Student debt repayments have officially restarted after the long pandemic pause; now, what does that have to do with the restaurant stocks to sell? Throw in high inflation and soaring interest rates, and consumers will find it increasingly difficult to make ends meet, let alone eat out.
That’s reflected in credit data, as credit card delinquency rates are now reaching levels last seen in the 2008 financial crisis. As you might imagine, this all adds up to quite a bitter recipe for the restaurant industry. With consumers looking to pinch pennies, expect restaurants to resort to more heavy discounting to keep diners around. These three restaurant stocks to sell look particularly vulnerable.
Cava Group (CAVA)
Cava Group (NYSE:CAVA) is a fast-casual Mediterranean restaurant chain. The company had a well-received IPO this June and traded higher following its debut as investors hoped they had found the Chipotle (NYSE:CMG) of Mediterranean food.
If Cava could actually reach the size and success of Chipotle, shares would be a home run investment. However, many other fast-growing restaurant chains have been compared to Chipotle, and few end up managing anywhere near the same level of success. People only eat at so many different restaurants, after all, and it’s hard to build new thousand-plus location chains in such a crowded market.
There is also some question as to whether there is a nationwide demand for Mediterranean cuisine at a ubiquitous scale. Not every type of food, like burgers, pizza, or Mexican, has such broad appeal across different demographics. The jury remains out on Cava’s appeal in more regional or distinct markets.
That’s especially true as it follows in the footsteps of Zoes Kitchen, which offers a similar menu. Zoes was publicly traded; Cava eventually acquired it for just $300 million and eventually shut down the brand. The fact that the first significant national Mediterranean chain failed doesn’t necessarily imply Cava will also fail, but it speaks to the challenge in trying to make the concept into a category-defining destination on par with Chipotle.
Cava remains unprofitable and goes for a lofty $3.4 billion market capitalization. Especially heading into a slowdown in consumer spending and a potential recession, CAVA stock appears set for a massive valuation reset.
Yum! Brands (YUM)
Yum! Brands (NYSE:YUM) is a diversified fast food and fast-casual restaurant chain. It operates four well-known brands: Taco Bell, KFC, Pizza Hut, and Habit Burger.
Taco Bell and Habit are still popular brands that attract much consumer passion among their fanbases. However, there’s a perception that KFC’s best days are behind it, as other chicken franchises like Chick-fil-A have a much stronger brand appeal. Similarly, Pizza Hut has struggled to keep up with several other leading pizza chains.
This is reflected in Yum’s overall results. Back in 2014, Yum produced $6.6 billion in revenues. In 2022, even with the subsequent acquisition of Habit, it generated only $6.8 billion in revenues. Given the inflation surge, flat revenues over that time is terrible news and even worse considering where it would be without the M&A boost.
Adding to the worries, Yum has a chunky $11.2 billion in long-term debt. With interest rates soaring, every tick-up will cost Yum more in financing costs over time. Combine sluggish revenues, surging operating costs, and a large debt load and YUM stock has a difficult road ahead.
Arcos Dorados (ARCO)
Arcos Dorados (NYSE:ARCO) — which is the Spanish equivalent of the phrase “Golden Arches” — is McDonald’s largest international franchisor. It has a massive footprint in Argentina and Brazil, along with operating McDonald’s (NYSE:MCD) locations in a variety of other Latin American markets.
In theory, the McDonald’s of South America sounds appealing. In practice, it has left investors with indigestion. Arcos Dorados went public in 2011 at $17/share. Today, shares trade for less than $9. The company has struggled to generate meaningful shareholder value largely due to Brazil’s persistent economic woes and Argentina’s hyperinflation, making it more challenging to capitalize on its revenues effectively.
For investors who like the idea of Latin American restaurants, I’d argue there is a much more appealing alternative. Mexico’s Alsea (OTCMKTS:ALSSF) is the largest fast-food restaurant chain based in Latin America, with more than 4,500 locations globally. Its core brands are Starbucks (NASDAQ:SBUX) and Domino’s Pizza (NYSE:DPZ), locations in the Mexican market. I’d argue that Domino’s and Starbucks are more lively brands than McDonald’s nowadays and that Mexico is a more compelling market than Brazil or Argentina.
As such, ARCO stock is one of the top restaurant stocks to sell among Latin American restaurant names. Plus, Arcos Dorados could be set for quite a tumble this autumn if Argentina’s upcoming political elections disappoint markets and/or Brazil’s economy slides back into recession.
On the date of publication, Ian Bezek held a long position in Alsea shares listed on the Mexican stock exchange. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
