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A beaten-down sector

The COVID-19 pandemic triggered one of the most challenging operating environments for the restaurant business in history. During the initial outbreak, restaurants in many regions were ordered to either shut down completely or only offer takeout. And even as the economy reopened, some restaurants still had to operate at reduced capacity.

Obviously, not all restaurants survived the pandemic. Yet those that did still have to face another challenge — spiking inflation.

Wholesale food costs have gone up substantially. Wages have risen as well. Many restaurants have increased their prices to offset higher operating costs. But consumers don’t have an unlimited budget.

According to a CNBC survey earlier this year, 53% of Americans say that they have reduced their dining out spending due to rising prices.

The good news? There are signs that the inflation pressure is easing for the restaurant industry.

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Making a comeback

When restaurant chain Wingstop (WING) reported Q2 earnings on July 28, it noted a decrease in food, beverage and packaging costs, which was mainly driven by an 18.8% year-over-year decline in the cost of bone-in chicken wings.

“We are in a unique position for the back half of 2022 where we are benefiting from meaningful deflation in bone-in wings, have a proven playbook, along with sales-driving levers that give us confidence in our ability to deliver on our outlook for 2022,” said Wingstop’s president and CEO Michael Skipworth.

Investors liked the news. On the day Wingstop reported earnings, its shares shot up 20%.

And that momentum has continued as Wingstop shares currently trade at $134.86 apiece.

Wingstop is not alone. Its peers, such as Cracker Barrel Old Country Store (CBRL), BJ’s Restaurants (BJRI) and Jack in the Box (JACK) have all rallied since Wingstop’s Q2 earnings release.

If this “meaningful deflation” persists, restaurant stocks might be able to see better days ahead.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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