Restaurants’ gross margins are increasing because the prices that they pay for goods, services and labor are no longer rising rapidly. Some of their costs are increasing slowly, while others are falling. Instead of lowering prices in response to their easing cost pressures, restaurant chains are reporting higher profits and/or buying back their shares. For example, Darden Restaurants (NYSE:DRI), mentioned that it has seen labor costs stabilize and lower-than-expected commodity prices. With restaurant chains getting a boost from easing cost pressures and strong spending by the top 30% or so of wage earners, here are three top restaurant stocks to buy.
Shake Shack (SHAK)
Shake Shack (NYSE:SHAK) stock rose almost 6% in the last month, and 70% in the last six months. It’s safe to say, SHAK is indeed sizzling.
In March, Shake Shack tapped Papa John’s (NASDAQ:PZZA) CEO Rob Lynch to take its top spot. Under Lynch, who became CEO of Papa John’s in 2019, the pizza chain’s operating income surged from $19.8 million in 2019 to $156.4 million last year. As a result, I expect Shake Shack to continue to perform very well over the long term.
In the first quarter, the chain’s revenue jumped 15% versus the same period a year earlier to $290.5 million, while its EBITDA jumped 30% year-over-year to $35.9 million.
Chipotle Mexican Grill (CMG)
Chipotle (NYSE:CMG) has become one of the top restaurant stocks to buy in America and is quite popular among millennials, whose spending power is rapidly increasing. The firm’s revenue jumped 14% last quarter versus the same period a year earlier to a huge $2.7 billion. Moreover, its comparable restaurant sales climbed a rather impressive 7% year-over-year in Q1.
The firm is also benefiting from the previously mentioned profit-margin gains. Indeed, Chipotle’s operating margin came in at 26.3% last quarter, up from 15.5% in Q1 of 2023. As a result, it’s not surprising that the company’s earnings per share jumped 14% year-over-year to $13.01.
Investor’s Business Daily gives Chipotle its highest possible Composite Rating of 99, and the shares have risen over 40% so far this year.
Dutch Bros (BROS)
I believe that Starbucks (NASDAQ:SBUX) has been meaningfully hurt by strong, growing competition from Dutch Bros (NYSE:BROS). That’s largely because the latter coffee chain has become a favorite among millennials.
Dutch Bros recently reported very strong Q1 results as its revenue jumped 40% versus the same period a year earlier to $275 million. Moreover, its adjusted same shop sales soared by a very impressive 10%, and its adjusted EBITDA soared 120% YOY to $52.5 million.
Investment bank TD Cowen responded to the company’s Q1 results by upgrading the shares to “buy” from “hold.” The bank expects the company to report stronger-than-expected 2024 results. TD Cowen believes that the company is benefiting from its innovative beverages, targeted loyalty program offers and paid ads.
BROS stock climbed 15% in the five days, and Investor’s Business Daily gives the name a Composite Rating of 98 out of 99.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
