Goldman Sachs Advises ‘Think Selective’ on Restaurant Stocks — Here Are 2 Names to Consider

Investors in the restaurant sector are growing concerned about a challenging macroeconomic environment, marked by emerging risks affecting consumers. These include mixed consumer data and growing fatigue concerning higher restaurant prices, both in absolute terms and compared to grocery costs.

Amidst these conditions, Goldman Sachs analyst Christine Cho is taking a ‘selectively constructive’ attitude as she kicks off her firm’s coverage of the restaurant sector. Her outlook balances a broad belief in resilient business dynamics bolstering the industry overall, with targeted insights favoring specific stocks poised for strength.

“We hold a selectively constructive view of the restaurants, as we believe spending will continue to grow and expand share of PCE (personal consumption expenditures) given still-steady spending outlook and more permanent behavior shifts post-covid (i.e., digital, convenience) acting as long-term tailwinds,” Cho noted.

The analyst goes on to lay out the generally supportive factors for the sector: “Traffic and unit growth will become an increasingly important part of the restaurants’ growth equation, driving a bigger divergence across the peer set. That said, we focus on identifying 1) concepts that could drive healthy traffic growth with unique brand proposition/differentiated offerings, and/or 2) concepts with a path for accelerated unit growth.”

This stance is followed by several specific recommendations for restaurant stocks. We’ve used the TipRanks database to get the broader view of two names that Goldman’s Cho is considering; let’s take a closer look, and find out just what makes these choices so compelling.

Starbucks (SBUX)

We’ll start with the world’s largest coffee shop company, Starbucks. Founded in 1971, the company hasn’t just reached the top of its own niche; it has also become one of the world’s iconic brand names. The company’s path has wound its way from a single shop, selling tea, spices, and ground and whole bean coffee in Seattle’s Pike Place Market to a global network counting tens of thousands of stores in more than 80 markets, serving millions of customers every day. Starbucks stores are run as both company-owned and franchise operations.

Starbucks’ long-term success can be seen in the company’s gross revenues. In 2023, the coffee chain reported $35.98 billion in sales, up 11.55% year-over-year.

In addition to generating strong revenues, Starbucks also has a reputation for reliable dividends. The company has been paying out common share divs since 2010, and has gradually raised the payment. The current dividend, of 57 cents per share, was paid out at the end of May, and its annualized rate of $2.28 gives a forward yield of 2.8%.

The most recent quarterly report, released on April 30 for fiscal 2Q24, put a serious speedbump in Starbucks’ path. The company reported a serious decline in walk-in customers, particularly in its core US market, where walk-in traffic showed a 7% decline in the quarter. Top line revenue in the quarter came to $8.56 billion, down 1.8% year-over-year and missing the forecast by $600 million. At the bottom line, Starbucks reported a non-GAAP EPS figure of 68 cents, down 12 cents from the estimates. Management attributed the revenue miss to a ‘complex operating environment.’ Shares in Starbucks fell by 16% after the earnings report was released. Investors had expected to see a slowdown in Starbucks’ business, but the magnitude of the decline came as a surprise, and the shares are still down more than 9%.

For analyst Cho, however, setting out the Goldman view on Starbucks, the stock’s share price decline represents a buying opportunity. She writes of the stock, “Following a sizable reset of consensus expectations following FY2Q24 results and some early signs of sequential improvement in the Apr-May frequency data, we believe SBUX provides an attractive risk-reward opportunity… We acknowledge the still-prevalent market skepticism as well as fundamental issues (throughput, engagement of younger customers, etc.) which need to be addressed; however, we believe the worst is behind and expect to see the second derivative start to improve from FY3Q24E.”

Cho quantifies her upbeat outlook on SBUX with a Buy rating, and her $100 price target implies a one-year upside potential of nearly 25%. (To watch Cho’s track record, click here)

Turning now to the rest of Wall Street, where the stock has a Moderate Buy rating, based on 7 additional Buys and 18 Holds set in recent weeks, and the $88.78 average price target suggests share appreciation of 11% in the next 12 months. (See Starbucks stock forecast)

Shake Shack (SHAK)

The next stock on our list is Shake Shack, a New York City-based hamburger chain with its roots in Madison Square Garden. The company currently has more than 520 locations, including more than 335 across 33 states plus DC. Shake Shack’s international presence is especially strong in Asia, where it has locations in Hong Kong and Shanghai, Singapore and Tokyo. The chain is also represented in London, Istanbul, and Dubai.

These locations offer up Shake Shack’s versions of the American classic, the burger and a shake. The company prides itself on using the best ingredients for its beef and chicken patties, its hand-spun shakes and homemade lemonade, and on serving up high-quality food in a hospitable environment at a great value. Shake Shack has built its brand on this foundation, as a burger chain with a difference, to create a wide-spread customer appeal.

The company’s financial performance reflects its reputation for quality. Shake Shack’s revenues have been mostly trending upwards for several years. In its last earnings release, Shake Shack reported 1Q24 revenue of $290.5 million. This figure came in just under the forecast, missing by only $450,000, and was up more than 14% from the previous year. The company’s non-GAAP EPS, its bottom-line figure, came to $0.13 per share, 3 cents better than had been anticipated.

Checking in again with Goldman’s Cho, we find that this company’s sound performance, loyal customer base, and solid potential caught her attention. Cho wrote of Shake Shack, “SHAK appears to be at an inflection point. We expect EPS to more than double in the next two years, driven by a c.3% SSSG, mid-teens unit growth, and company restaurant profit margin steadily improving to 21-22% levels (with longer-term potential closer to mid-20% levels). We appreciate management’s clear layout of its strategic priorities that includes 1) delivering a consistent guest experience, 2) growing the top-line and brand awareness with plans to double advertising spend this year, 3) continued margin recovery, 4) improving new store returns with a 10% reduction in new-build cost, and 5) developing and rewarding teams.”

These comments support Cho’s Buy rating, and her $110 price target suggests an upside of 21% on the one-year horizon.

This is a more bullish viewpoint than the Wall Street consensus on SHAK. Overall, the shares have a Hold rating from the analyst consensus, based on 17 recent reviews that include 6 Buys, 9 Holds, and 2 Sells. However, offering something of a contradiction, the average price target of $110.13 is in-line with the bullish Goldman view. (See SHAK stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.