Stocks to sell

3 Restaurant Stocks to Avoid as Inflation Bites and Covid Lingers

Wondering if you should be selling your restaurant stocks in 2024? As we start the new year, market professionals look at the tea leaves and provide their outlook on how the rest of the year will unfold. According to Morgan Stanley, one of the growing concerns is a hard landing and a surprising recession due to signs of weakening from an elevated interest rate that has impacted consumer spending and a declining labor market throughout the year. This all means added risk to cyclical sectors that are highly affected by economic downturns, like the restaurant sector.

Indeed, restaurants are closely tied to consumer spending, as consumers with lower disposable income are likelier to eat at home when times are tough. If you think that the restaurant sector will inevitably be hit hard, then I recommend to review your positions, and if you happen to own any of these three stocks, consider selling them before it’s too late.

BJ’s Restaurants (BRJI)

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First on the list of restaurant stocks to sell is BJ’s Restaurants (NASDAQ:BRJI), a casual dining restaurant chain that offers approximately 100 menu items. This includes items like prime rib, EnLIGHTened Entrees, Glazed Salmon, Pizookie desserts, BJ craft beers, and its original signature deep-dish pizza.

The company operates roughly 216 restaurants in 30 states. Its craft beer is manufactured in its six in-house brewing facilities alongside independent third-party brewers using BJ’s recipes. BRJI’s beers have won awards and medals from various competitions and are taken seriously by the company. 

BJRI ended its latest financial quarter with a 2.3% YoY increase in its total revenues and an expansion in restaurant operating margin to 11.9%. While that might sound good, the company also reported an increase in its net loss to 137.5% and a widening diluted net loss per share of 128% on a YoY basis. Its CEO, Greg Levin, highlighted its restaurant openings and progress in its cost-saving initiatives; however, this does not overshadow its lackluster performance and the company’s ability to manage its costs effectively. Uncertainty in its expense management and increased net loss signals a potential risk to anyone holding BRJI; we believe this is one of the restaurant stocks you should sell for now.

The ONE Group Hospitality (STKS)

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The ONE Group Hospitality (NASDAQ:STKS) is the second on our list of restaurant stocks to sell. One group is an owner, operator, manager, and licensee of restaurants, lounges, hotels and hospitality venues.

The company operates in three segments: STK, which operates its STK restaurant locations; Kona Grill for Kona Grill restaurant locations; ONE Hospitality, which focuses on unique brands and venue concepts like its Marconi, Radio and Rivershore Bar & Grill, and Hideout. In addition, the company operates, manages, owns, or licenses around 63 venues, including its 25 Kona Grills and 25 STK venues.

While the company reported a 5.3% increase in its total GAAP revenue on a YoY basis, its comps dropped by 3.0% amid a 5.5% decline in same-store sales. Despite a stable restaurant operating profit of $9.1 million, its profit margin declined by 12.3% YoY on its company-owned restaurant net revenues thanks to higher labor costs, increased marketing expenses, and inflation-related operating costs. The company also reported a net loss of $3.1 million (on a GAAP basis), compared with a net income of $0.5 million in the year-ago quarter. Adjusted EBITDA also took a hit, declining by 13.3% on a YoY basis. Despite its growth strategies, declining sales and profitability paints a challenging picture for the company, making us think it is one of the restaurant stocks to sell right now.

Krispy Kreme (DNUT)

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Last, we have Krispy Kreme (NASDAQ:DNUT) – one of the most recognized brands globally – actually, I wasn’t surprised to see their locations in the UAE over my New Year’s holiday. Krispy Kreme operates a network of fresh Doughnut Shops, e-commerce, delivery, and partnerships with other retailers.

DNUT’s operations in three segments: U.S. and Canada for its company-owned operations in both countries; international segments for its operations in the U.K., Australia, New Zealand, Ireland, and Mexico; and market development for its franchise operations. According to its first-ever responsibility report, the company is currently on track to meet sustainability goals.

While the company might be faring well when it comes to ESG, DNUT’s latest financial report highlighted some glaring red flags. Krispy Kreme recorded a substantial GAAP net loss of $40.3 million, 240.0% lower from the year-ago quarter. Its diluted net income (adjusted) declined by 3.6%. Glaringly, its net debt position also elevated to $849.8 million as of October 1, 2023. While there are upticks in the company’s organic revenue, adjusted EBITDA, and global points of access on a YoY basis, its financial performance, elevated net loss, and less promising guidance highlight why investors should review their position on DNUT or sell the stock in its entirety. 

On the date of publication, Rick Orford did not have (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.

Rick Orford is a Wall Street Journal best-selling author, investor, influencer, and mentor. His work has appeared in the most authoritative publications, including Good Morning America, Washington Post, Yahoo Finance, MSN, Business Insider, NBC, FOX, CBS, and ABC News.

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