U.S. restaurant sales showed strong resilience last month. Eating and drinking places generated total sales of $85 billion, up 0.7% from April, and marked the fourth consecutive monthly increase in consumer spending on restaurants and bars.

In-home spending on food increased more than menu items at quick-service and fast-casual restaurants. According to Nick Cole, Mitsubishi UFJ Financial Group’s Head of Restaurant Finance, this trend makes restaurants appealing.

Given this backdrop, fundamentally strong restaurant stocks Good Times Restaurants Inc. (GTIM) and Arcos Dorados Holdings Inc. (ARCO) could be solid investments.

On the other hand, restaurant operators remain concerned about rising food costs and worker shortages. Hence, we think fundamentally weak stocks Shake Shack Inc. (SHAK) and Sweetgreen, Inc. (SG) might be best avoided now.

Stocks to Buy:

Good Times Restaurants Inc. (GTIM)

GTIM engages in the U.S. restaurant business as the operator of upscale quick-service drive-through dining restaurant Good Times Burgers & Frozen Custard and full-service upscale casual dining restaurant Bad Daddy’s Burger Bar.

For the second quarter ended March 29, GTIM’s total net revenue increased 15.1% to $33.60 million. This can be attributed to a rise of 15.1% from the prior-year quarter in restaurant sales to $33.36 million, while its franchise revenues improved 18.3% year-over-year to $233 thousand.

GTIM’s stock has gained 13.7% over the past month and 10.6% over the past five days to close its last trading session at $2.98.

GTIM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

GTIM has an A grade for Value and a B for Growth, Momentum, Sentiment, and Quality. Within the B-rated Restaurants industry, it is ranked #1 of 47 stocks.

Click here to see the additional POWR Ratings for GTIM (Stability).

Arcos Dorados Holdings Inc. (ARCO)

ARCO, based in Montevideo, Uruguay, operates as a McDonald’s Corporation (MCD) restaurant franchisee. The company possesses the exclusive right to own, use, and grant franchises of McDonald’s restaurants in Latin America and the Caribbean.

In May, ARCO announced its intent to redeem $123 million of its outstanding 6.625% senior notes due 2023. In March, the company declared a $0.15 per share, payable to all Class A and Class B shareholders in four quarterly installments. This reflects upon the company’s shareholder return ability.

ARCO’s total revenues increased 40.9% year-over-year to $790.68 million in the first quarter ended March 31. Its adjusted EBITDA grew 228% from the year-ago value to $78.50 million, while its net income improved 183% year-over-year to $24.63 million. The company’s EPS increased 185.7% from the same period last year to $0.12.

The consensus EPS estimate of $0.04 for the fiscal second quarter (ending June 2022) indicates a 118.7% improvement year-over-year. The consensus revenue estimate of $728.29 million for the same quarter reflects a 22.9% increase from the same period last year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 12.4% over the past year and 29.6% over the last six months to close its last trading session at $6.91.

ARCO’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. ARCO is rated an A in Sentiment and a B in Growth and Value. It is ranked #2 in the Restaurants industry.

To see additional POWR Ratings for Momentum, Stability, and Quality for ARCO, click here.

Stocks to Avoid:

Shake Shack Inc. (SHAK)

SHAK is the owner, operator, and licensor of Shake Shack restaurants. The company’s offerings include hamburgers, hot dogs, chicken, shakes, beer, wine, and other products.

In May, SHAK and licensee Maxim’s Caterers Limited announced the expansion of their partnership and their plan to open 15 Shacks in Thailand by 2032. However, the gains from this expansion might be stretched over a long period.

For the first fiscal quarter ended March 30, SHAK’s total expenses increased 32.1% year-over-year to $218.33 million. Net income and EPS of class A common stock declined 2,062.1% and 2,700% from the prior-year period to a negative $11.28 million and a negative $0.26.

Analysts expect the company’s EPS to decrease 395.7% year-over-year to a negative $0.30 for the fiscal year 2022.

The stock has declined 59.9% over the past year and 10.7% over the past month to close its last trading session at $42.20.

The POWR Ratings reflect SHAK’s bleak prospects. The stock has an overall D rating, equating to Sell in our POWR Ratings system. SHAK has a Growth, Sentiment, and Quality grade of D. It is ranked #42 in the Restaurants industry.

Click here to see additional POWR Ratings for SHAK (Value, Momentum, and Stability).

Sweetgreen, Inc. (SG)

SG develops and operates restaurants serving healthy foods prepared from seasonal and organic ingredients. The company also engages in activities such as accepting online orders and selling gift cards that can be redeemed in its restaurants.

In March, SG announced its plans to open its first “sweetlane” concept in Schaumburg, Illinois, within the next year. The sweetlane customers are expected to be able to place orders in advance through the company’s digital platform. However, gains from this venture might take some time to realize.

In the first fiscal quarter ended March 27, SG’s net loss increased 63.8% year-over-year to $49.20 million. Total operating expenses increased 95% from the prior-year quarter to $62.87 million. The company’s EPS came in at a negative $0.45.

Street expects SG’s EPS to come in at a negative $0.18 in the quarter ending June 2022.

The stock has declined 58.3% year-to-date and 29.4% over the past month to close its last trading session at $13.33.

This bleak outlook is reflected in SG’s POWR Ratings. The stock has an overall F grade, which equates to a Strong Sell in our proprietary rating system. SG has a D grade for Growth, Value, Stability, Sentiment, and Quality. It is ranked #44 in the same industry.

In addition to the POWR Ratings grades we’ve stated above, one can see SG’s ratings for Momentum here.

GTIM shares were trading at $3.09 per share on Monday afternoon, up $0.11 (+3.69%). Year-to-date, GTIM has declined -28.80%, versus a -17.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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