From fast food to fine dining, restaurants play a vital societal role. It also feels like demand is strong as consumers always seem to be chasing the next hot place or viral fast food creation on social media (the Bloomin' Onion? That's FIVE BIG BOOMS!). No surprise the industry has returned 24.6% over the past six months, beating the S&P 500 by 7.7 percentage points.

Nevertheless, investors must be mindful because any operational misstep or unforeseen change in preferences can kill profitability given the sector’s generally thin margins at the store level. Taking that into account, here are three restaurant stocks we’re swiping left on.

Bloomin' Brands (BLMN)

Market Cap: $1.06 billion

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. Weak same-store sales trends suggest there may be few opportunities in its core markets to open new restaurants
2. Sales are projected to tank by 8.7% over the next 12 months as demand evaporates
3. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 3.4 percentage points

At $12.40 per share, Bloomin' Brands trades at 5.6x forward price-to-earnings. Read our free research report to see why you should think twice about including BLMN in your portfolio, it’s free.

Darden (DRI)

Market Cap: $23.48 billion

Founded in 1968 as Red Lobster, Darden (NYSE:DRI) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.

Why Are We Hesitant About DRI?

1. Annual sales growth of 6% over the last five years lagged behind its restaurant peers as its large revenue base made it difficult to generate incremental demand
2. Lacking pricing power results in an inferior gross margin of 21.1% that must be offset by turning more tables
3. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 8.3% annually

Darden is trading at $200.43 per share, or 20.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why DRI doesn’t pass our bar.

Brinker International (EAT)

Market Cap: $8.09 billion

Founded by Norman Brinker in Dallas, Brinker International (NYSE:EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.

Why Do We Think Twice About EAT?

1. Lack of new restaurants puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
2. Challenging supply chain dynamics and bad unit economics are reflected in its low gross margin of 15.1%
3. Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability

Brinker International’s stock price of $183.44 implies a valuation ratio of 26.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than EAT.

Stocks We Like More

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Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.