3 Restaurant Stocks We Think Twice About

Restaurants are go-to meeting hubs for friends, family, and colleagues. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 14.4% over the past six months. This performance is a noticeable divergence from the S&P 500’s 15.3% return.

Investors should tread carefully as any operational misstep or unforeseen change in preferences can have you catching a falling knife. Keeping that in mind, here are three restaurant stocks we’re swiping left on.

Bloomin' Brands (BLMN)

Market Cap: $568.8 million

Owner of the iconic Australian-themed Outback Steakhouse, Bloomin’ Brands (NASDAQ:BLMN) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.

Why Should You Dump BLMN?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
2. Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
3. High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Bloomin' Brands’s stock price of $6.67 implies a valuation ratio of 6.6x forward P/E. Read our free research report to see why you should think twice about including BLMN in your portfolio.

Jack in the Box (JACK)

Market Cap: $321.9 million

Delighting customers since its inception in 1951, Jack in the Box (NASDAQ:JACK) is a distinctive fast-food chain known for its bold flavors, innovative menu items, and quirky marketing.

Why Are We Out on JACK?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Earnings per share have contracted by 20% annually over the last six years, a headwind for returns as stock prices often echo long-term EPS performance
3. 11× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $16.44 per share, Jack in the Box trades at 3.9x forward P/E. Dive into our free research report to see why there are better opportunities than JACK.

Denny's (DENN)

Market Cap: $314.7 million

Open around the clock, Denny’s (NASDAQ:DENN) is a chain of diner restaurants serving breakfast and traditional American fare.

Why Should You Sell DENN?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
2. Smaller revenue base of $457.2 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Denny's is trading at $6.15 per share, or 15x forward P/E. Check out our free in-depth research report to learn more about why DENN doesn’t pass our bar.

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