While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".

A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. That said, here are three profitable companies to steer clear of and a few better alternatives.

Lovesac (LOVE)

Trailing 12-Month GAAP Operating Margin: 2.3%

Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.

Why Are We Wary of LOVE?

1. Lackluster 1.6% annual revenue growth over the last two years indicates the company is losing ground to competitors
2. Low free cash flow margin of 0.6% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $14.55 per share, Lovesac trades at 54.6x forward P/E. If you’re considering LOVE for your portfolio, see our FREE research report to learn more.

Herc (HRI)

Trailing 12-Month GAAP Operating Margin: 15.5%

Formerly a subsidiary of Hertz Corporation and with a logo that still bears some similarities to its former parent, Herc Holdings (NYSE: HRI) provides equipment rental and related services to a wide range of industries.

Why Do We Think Twice About HRI?

1. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 3.4% annually
2. Free cash flow margin dropped by 13.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Herc’s stock price of $117.79 implies a valuation ratio of 18.3x forward P/E. Read our free research report to see why you should think twice about including HRI in your portfolio.

UniFirst (UNF)

Trailing 12-Month GAAP Operating Margin: 7.7%

With a fleet of trucks making weekly deliveries to over 300,000 customer locations, UniFirst (NYSE: UNF) provides, rents, cleans, and maintains workplace uniforms and protective clothing for businesses across various industries.

Why Does UNF Worry Us?

1. Estimated sales growth of 1% for the next 12 months implies demand will slow from its two-year trend
2. Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging

UniFirst is trading at $159.50 per share, or 18.5x forward P/E. Check out our free in-depth research report to learn more about why UNF doesn’t pass our bar.

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