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".

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.

Boot Barn (BOOT)

Trailing 12-Month GAAP Operating Margin: 13.3%

With a strong store presence in Texas, California, Florida, and Oklahoma, Boot Barn (NYSE: BOOT) is a western-inspired apparel and footwear retailer.

Why Are We Hesitant About BOOT?

1. Sales trends were unexciting over the last three years as its 9.3% annual growth was below the typical consumer retail company
2. Subscale operations are evident in its revenue base of $2.07 billion, meaning it has fewer distribution channels than its larger rivals
3. Gross margin of 37.5% is below its competitors, leaving less money for marketing and promotions

Boot Barn is trading at $187.09 per share, or 26.1x forward P/E. Dive into our free research report to see why there are better opportunities than BOOT.

LGI Homes (LGIH)

Trailing 12-Month GAAP Operating Margin: 6%

Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.

Why Do We Think LGIH Will Underperform?

1. Backlog has dropped by 10.3% on average over the past two years, suggesting it’s losing orders as competition picks up
2. Diminishing returns on capital suggest its earlier profit pools are drying up
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

LGI Homes’s stock price of $53.69 implies a valuation ratio of 14x forward P/E. If you’re considering LGIH for your portfolio, see our FREE research report to learn more.

Clear Channel Outdoor (CCO)

Trailing 12-Month GAAP Operating Margin: 19.3%

With thousands of digital and traditional displays lighting up America's highways, city streets, and airports, Clear Channel Outdoor (NYSE: CCO) operates billboards, street furniture, and airport displays, connecting advertisers with millions of consumers across the US.

Why Does CCO Worry Us?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 5.3% annually over the last five years
2. Negative free cash flow raises questions about the return timeline for its investments
3. 13× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $1.99 per share, Clear Channel Outdoor trades at 14.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CCO doesn’t pass our bar.

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