Due to workforce shortages and rising inflation, the restaurant industry is facing a challenging business environment, with the majority of operators seeing these issues as key obstacles for their business.
Therefore, fundamentally weak restaurant stocks Sweetgreen, Inc. (SG), Kura Sushi USA, Inc. (KRUS), and Yoshiharu Global Co. (YOSH) might be best avoided now.
According to a survey by TD, America's Most Convenient Bank, the top challenge for restaurants in 2023 is inflation. According to recent data, full-service menu prices increased by 8.8 % on average over the last two quarters of 2022, while quick-service menu prices increased by 7.7%.
Apart from inflation, other challenges include labor shortages and supply chain disruptions. According to the National Restaurant Association, restaurant staffing was 3.6% below pre-pandemic levels at the start of 2023. Meanwhile, 62% of operators report that they are unable to staff up to meet demand, and 80% have difficulty filling open positions.
As restaurants fall into a discretionary expense category, consumers are increasingly price sensitive when it comes to spending at restaurants, especially amid rising odds of a recession this year. According to a survey in January, most respondents said they were eating out at restaurants less often.
Take a detailed look at the stocks mentioned above:
Sweetgreen, Inc. (SG)
SG, together with its subsidiaries, develops and operates fast-casual restaurants serving healthy foods prepared from seasonal and organic ingredients.
SG’s ROTA of negative 20.95% is lower than the industry average of 3.92%. Also, its ROCE of negative 31.89% is lower than the industry average of 11.79%.
Its forward Price/Sales of 1.43x is 68.7% higher than the industry average of 0.84x, while its forward EV/Sales multiple of 1.37 is 25% higher than the industry average of 1.10.
SG’s adjusted EBITDA loss increased 26.6% year-over-year to $17.94 million for the fourth quarter that ended December 25, 2022. The company’s current assets came in at $346.15 million for the period that ended December 25, 2022, compared to $506.66 million for the period that ended December 26, 2021.
Also, its current liabilities came in at $72.55 million, compared to $47.53 million for the same period.
SG’s EPS is expected to remain negative in 2023 and 2024. It failed to surpass the EPS estimates in three of four trailing quarters. It has lost 78.7% over the past year to close the last trading session at $7.46.
SG’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is also rated a D grade for Stability, Sentiment, and Quality. In the Restaurants industry, it is ranked #45 out of 46 stocks. Click here to see SG’s rating for Growth, Value, and Momentum.
Kura Sushi USA, Inc. (KRUS)
KRUS operates technology-enabled Japanese restaurants in the United States. KRUS serves Japanese cuisine through its sushi service model. Its menu comprises nigiri, hot rolls, hand rolls, gunkan, noodles, ojyu, teppanyaki, desserts, and beverages.
KRUS’ ROCE of negative 1.73% is lower than the industry average of 11.79%. Also, its ROTA of negative 0.77% is significantly lower than the industry average of 3.92%.
Its forward Price/Sales of 3.46x is 310% higher than the industry average of 0.84x. Its forward EV/Sales multiple of 3.84 is 249.5% higher than the industry average of 1.10.
KRUS’ operating loss increased 70.6% year-over-year to $2.15 million for the first quarter ended November 30, 2022. Its net loss for the period increased by 63.8% year-over-year to $2.09 million. Also, its loss per share came in at $0.21, up 61.5% year-over-year.
Street expects KRUS’s EPS is expected to fall 150% year-over-year to negative $0.2. The stock has lost 10.9% over the past six months to close the last trading session at $65.59.
KRUS has an overall F rating, equating to a Strong Sell in our POWR Ratings system.
It has a D for Stability, Value, and Quality. It is ranked last in the same industry. We have also rated KRUS for Sentiment, Growth, and Momentum. Get all the KRUS ratings here.
Yoshiharu Global Co. (YOSH)
YOSH operates as Japanese restaurant in California. It offers ramen, sushi, bento boxes, and other Japanese cuisines.
YOSH’s ROCE of negative 170.11% is lower than the industry average of 11.79%. Also, its ROTA of negative 23.79% is significantly lower than the industry average of 3.92%.
Its trailing-12-month Price/Book of 2.66x is 24.8% higher than the industry average of 2.13x. Its trailing-12-month EV/Sales multiple of 2.49 is 119.4% higher than the industry average of 1.13.
For the fourth quarter that ended December 31, 2022, YOSH’s total restaurant operating expenses increased 28.4% year-over-year to $8.11 million. Its loss from operations for the period increased by 103.5% year-over-year to $3.78 million. Also, its net loss came in at $3.49 million, up 113.9% year-over-year.
The stock has lost 5.4% over the past month to close the last trading session at $1.39.
YOSH’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. It also has a D grade for Growth, Quality, Stability, and Value. Within the same industry, it is ranked #44.
In addition to the POWR Rating grades we have stated above, you can see YOSH’s Sentiment and Momentum ratings here.
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SG shares rose $0.13 (+1.74%) in premarket trading Friday. Year-to-date, SG has declined -11.44%, versus a 6.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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