3 Restaurant Stocks to Avoid as Consumer Spending Slows

The consumer confidence index declined 1.4 points month-over-month to 113.8 this month. This can be attributed to concerns regarding surging COVID-19 omicron cases, 40-year high inflation rates, and other macroeconomic headwinds. Given omicron's high transmission rate even among the vaccinated, people have limited their outdoor activities, causing restaurants to suffer reduced patronage over the past few months.

In addition, the ongoing market correction and rising political tensions have caused consumers and economists to become bearish about the economic recovery. This is evident in a 4.6-point decline in the expectations index. Regarding this, FWDBONDS chief economist Christopher Rupkey said, "Consumers already think business conditions will not be as positive six months from now [as] before the stock market tumbled."

Considering all these factors, we think it advisable to avoid fundamentally bleak restaurant stocks such as Sweetgreen, Inc. (SG), Shake Shack Inc. (SHAK), and Dutch Bros Inc. (BROS)

Sweetgreen, Inc. (SG)

SG in Washington, D.C., is an American fast-food restaurant chain. It serves healthy foods prepared from seasonal and organic ingredients. The company owns and operates 140 restaurants across 13 states and Washington. Often known as the “Starbucks of salads,” SG aims to double its footprint over the next five years.

SG made its stock market debut on Nov. 18, 2021, through an initial public offering. The company sold 13 million shares at $28 each, raising $364 million in gross proceeds. It had an enterprise valuation of $5.50 billion after its stock market debut. The stock opened at $52 on its first trading day, which was 91% higher than its pre-IPO price. However, the stock has since declined 37% in price to close yesterday’s trading session at $31.20.

For its fiscal year, ended Dec.27, 2021, SG’s net revenues came in at $220.60 million. However, its same-store sales declined 26% year-over-year over this period. The company’s net loss was $141.20 million.

Analysts expect SG’s earnings per share to remain negative at least until 2022.

SG’s POWR Ratings reflect this bleak outlook. The company has an overall D rating, which translates to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

SG has a D grade for Value. Within the B-rated Restaurants industry, it is ranked #40 of 44 stocks. To see additional POWR Ratings (Momentum, Growth, Stability, Value, Sentiment, and Quality) for SG, click here.

Shake Shack Inc. (SHAK)

SHAK in New York City is an American fast food restaurant chain that operates and licenses Shake Shack restaurants internationally. The company owns and operates restaurants in more than 250 locations.

Earlier this month, SHAK announced plans to open more than 10 restaurants in Malaysia by 2031, with the first Shak opening in 2023. The company has similar expansion plans in China. However, these expansions will require massive capital investments. With negative profit margins and a bleak earnings growth outlook, these expansions might have a negative impact on the company’s bottom line during their initial period.

SHAK’s revenues (excluding the favorable impact of the 53rd week in the fiscal 2020 fourth quarter) increased 38.8% year-over-year to $203.30 million in its fiscal fourth quarter, ended Dec. 29, 2021. However, this indicates a decelerating growth rate because SHAK’s revenues rose 48.7% year-over-year in its third fiscal quarter, ended Sept. 30, 2021. Its operating loss and net loss amounted to $2.60 million and $2.40 million, respectively, in its fiscal third quarter. This can be attributed to a 43.3% rise in total expenses. Its loss per share came in at $0.06.

The negative $0.09 consensus EPS estimate for the first quarter, ending March 31, 2022, represents a 325% decline year-over-year. The company has a weak earnings surprise history; it missed the consensus EPS estimates in each of the trailing four quarters.

Over the past month, the stock has declined 15.6% in price and closed yesterday’s trading session at $62.90.

SHAK’s ratings reflect this weak outlook. The company has an overall D rating, which translates to Sell in our proprietary rating system.

SHAK has a D grade for Value, Stability, and Quality. Within the Restaurants industry, it is ranked #41 of 44 stocks. To see additional POWR Ratings (Growth, Sentiment, and Momentum) for SHAK, click here.

Dutch Bros Inc. (BROS)

BROS is a drive-thru coffee chain that operates company-owned and franchise locations throughout the U.S. It operates more than 470 locations in 11 states and serves a variety of coffees, caffeinated beverages, and other drinks. BROS is headquartered in Grants Pass, Ore.

BROS made its stock market debut on September 15 by listing 21.05 million shares on the New York Stock exchange. Priced at $23 per share, BROS raised $556.80 million in gross proceeds. The stock opened at $32.50 on its first trading day, 41.3% higher than its pre-IPO price. However, its shares have slumped 4% in price year-to-date and 30.6% over the past three months to close yesterday’s trading session at $48.85.

In its third fiscal quarter, ended Sept. 30, 2021, BROS’ total costs and expenses increased 211% year-over-year to $244.79 million. The company’s loss from operations widened by 1,544.7% from the prior-year quarter to $114.98 million. And its net loss widened by 1,859.9% from its year-ago value to $117.14 million.

Analysts expect BROS’s EPS for its fiscal year 2022 to come in at $0.09, representing a 52.6% decline year-over-year.

BROS has a grade of D for Stability. Among the 44 stocks in the Restaurants industry, it is ranked #37. Click here to see the additional POWR Ratings for Sentiment, Growth, Momentum, Value, and Quality for BROS.

SG shares were trading at $29.21 per share on Thursday morning, down $1.99 (-6.38%). Year-to-date, SG has declined -8.72%, versus a -7.66% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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