From fast food to fine dining, restaurants play a vital societal role. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. Unfortunately, these factors have spelled trouble for the industry as it has shed 3.9% over the past six months. This performance was discouraging since the S&P 500 held its ground.

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

Krispy Kreme (DNUT)

Market Cap: $921.7 million

Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ:DNUT) is one of the most beloved and well-known fast-food chains in the world.

Why Does DNUT Give Us Pause?

1. Cash burn makes us question whether it can achieve sustainable long-term growth
2. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $5.42 per share, Krispy Kreme trades at 17.9x forward price-to-earnings. If you’re considering DNUT for your portfolio, see our FREE research report to learn more.

Cracker Barrel (CBRL)

Market Cap: $887 million

Known for its country-themed food and merchandise, Cracker Barrel (NASDAQ:CBRL) is a beloved American restaurant and retail chain that celebrates the warmth and charm of Southern hospitality.

Why Should You Sell CBRL?

1. Sales trends were unexciting over the last five years as its 2.3% annual growth was below the typical restaurant company
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 17.2% annually while its revenue grew
3. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Cracker Barrel’s stock price of $39.96 implies a valuation ratio of 14.8x forward price-to-earnings. Read our free research report to see why you should think twice about including CBRL in your portfolio, it’s free.

Sweetgreen (SG)

Market Cap: $3.08 billion

Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE:SG) is a casual quick service chain known for its healthy salads and bowls.

Why Does SG Worry Us?

1. Poor expense management has led to operating losses
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Sweetgreen is trading at $26.30 per share, or 87.2x forward EV-to-EBITDA. To fully understand why you should be careful with SG, check out our full research report (it’s free).

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