Restaurants increase convenience and give many people a place to unwind. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 2.5% over the past six months. This performance was disappointing since the S&P 500 climbed 6.1%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one restaurant stock boasting a durable advantage and two we’re steering clear of.
Two Restaurant Stocks to Sell:
The Cheesecake Factory (CAKE)
Market Cap: $3.08 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Does CAKE Worry Us?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Estimated sales growth of 4.1% for the next 12 months implies demand will slow from its six-year trend
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
The Cheesecake Factory is trading at $61.48 per share, or 15.4x forward P/E. Dive into our free research report to see why there are better opportunities than CAKE.
BJ's (BJRI)
Market Cap: $803.8 million
Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.
Why Are We Out on BJRI?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Challenging supply chain dynamics and bad unit economics are reflected in its low gross margin of 14.9%
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $37.90 per share, BJ's trades at 16.9x forward P/E. To fully understand why you should be careful with BJRI, check out our full research report (it’s free).
One Restaurant Stock to Buy:
Wingstop (WING)
Market Cap: $5.17 billion
The passion project of two chicken wing aficionados in Texas, Wingstop (NASDAQ: WING) is a popular fast-food chain known for its flavorful and crispy chicken wings offered in a variety of sauces and seasonings.
Why Is WING a Good Business?
- Same-store sales growth averaged 8.6% over the past two years, showing it’s bringing new and repeat diners into its restaurants
- Highly efficient business model is illustrated by its impressive 26.1% operating margin
- WING is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Wingstop’s stock price of $192.05 implies a valuation ratio of 43.4x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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