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The U.S. restaurant industry continues to be impacted by high wages, food cost inflation and traffic woes in 2024 after two years of strong growth. The Zacks defined Retail – Restaurants industry is currently in the bottom 35% of the Zacks Industry Rank.
In the past year, the industry has grown just 3.3%, while its year-to-date return is a mere 1.1%. The broad-market index — the S&P 500 — has rallied 29.3% and 18.8%, respectively, over these periods. Since the restaurant industry is ranked in the bottom half of the Zacks Ranked Industries, we expect the restaurant industry to underperform the market over the next three to six months.
Despite this weakness, a handful of restaurant stocks are currently seeing positive earnings estimate revisions along with a favorable Zacks Rank. These are: Texas Roadhouse Inc. TXRH, Wingstop Inc. WING, Potbelly Corp. PBPB, El Pollo Loco Holdings Inc. LOCO and Meritage Hospitality Group Inc. MHGU. Investment in these stocks should provide good returns in the near future.
Restaurant Industry at a Glance
The restaurant industry has been facing declining traffic for quite some time. A rapid increase in menu prices is the primary reason behind traffic erosion. Restaurant operators are grappling with the high cost of operations.
Intense competition, high wages and food cost inflation are concerning. The industry continues to bear increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company’s margins.
The Department of Commerce, in its July retail sales report, revealed that sales at restaurants and bars increased 3.4% year over year but rose less than 0.4% month over month.
Restaurant operators are trying to remain buoyant focusing on digital innovation, sales-building initiatives and cost-saving efforts. Restaurant operators constantly partner with delivery channels and digital platforms to drive incremental sales.
Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and the rollout of self-service kiosks and loyalty programs continue to drive growth. Moreover, the industry is gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks.
Our Top Picks for Restaurant Stocks
We have narrowed our search to five restaurant stocks that have solid growth potential for the rest of 2024 and have seen positive earnings estimate revisions 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
Texas Roadhouse Inc.
Texas Roadhouse Inc. is a full-service, casual dining restaurant chain offering assorted seasoned and aged steaks hand-cut daily on the premises and cooked to order over open gas-fired grills. TXRH operates restaurants under the Texas Roadhouse and Aspen Creek names.
TXRH offers its guests a selection of ribs, fish, seafood, chicken, pork chops, pulled pork and vegetable plates, an assortment of hamburgers, salads and sandwiches. TXRH also provides supervisory and administrative services for other licensed and franchise restaurants.
Zacks Rank #1 Texas Roadhouse has an expected revenue and earnings growth rate of 15.6% and 39.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.3% over the last 30 days.
Wingstop Inc.
Wingstop Inc. 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 #2 Wingstop has an expected revenue and earnings growth rate of 36% and 51.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.4% over the last 30 days.
El Pollo Loco Holdings Inc.
El Pollo Loco Holdings Inc. develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco. LOCO operates and franchises restaurants located in California, Nevada, Arizona, Texas, Colorado, Utah, and Louisiana. LOCO also licenses its brand to restaurants in the Philippines.
LOCO specializes in flame-grilled chicken in a variety of contemporary Mexican-influenced entrees, including specialty chicken burritos, chicken quesadillas, chicken tortilla soup, Pollo Bowls and Pollo Salads.
Zacks Rank #2 El Pollo Loco Holdings has an expected revenue and earnings growth rate of 2% and 12.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 12.7% over the last 30 days.
Potbelly Corp.
Potbelly Corp. owns, operates, and franchises Potbelly sandwich shops. PBPB manages establishments for consuming food on premises. Its offerings include sandwiches, salads, soups, chili, chips, cookies, ice cream, and smoothies. Potbelly serves customers throughout the United States.
Zacks Rank #2 Potbelly has expected revenue and earnings growth rates of 4.2% and 33.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 17.6% over the last 30 days.
Meritage Hospitality Group Inc.
Meritage Hospitality Group Inc. specializes in the development and operation of restaurants and leisure properties. MHGU owns and operates casual dining restaurants in Michigan, through brands consisting of Twisted Rooster locations, Crooked Goose location and Freighters Eatery & Taproom location.
Twisted Rooster focuses on local products including local beers, wines and liquors. Crooked Goose — a classic corner pub —features old-school pubs. Freighters Eatery & Taproom provides unique waterfront dining.
Zacks Rank #1 MHGU has expected revenue and earnings growth rates of 2.8% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 44.3% over the last 60 days.
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Texas Roadhouse, Inc. (TXRH) : Free Stock Analysis Report
Potbelly Corporation (PBPB) : Free Stock Analysis Report
El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report
Wingstop Inc. (WING) : Free Stock Analysis Report
Meritage Hospitality Group Inc. (MHGU) : Free Stock Analysis Report
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