Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.

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

Kohl's (KSS)

Trailing 12-Month GAAP Operating Margin: 3.4%

Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE: KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.

Why Do We Steer Clear of KSS?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Earnings per share have dipped by 29.6% annually over the past three years, which is concerning because stock prices follow EPS over the long term
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Kohl's is trading at $17.55 per share, or 14.7x forward P/E. If you’re considering KSS for your portfolio, see our FREE research report to learn more.

First Watch (FWRG)

Trailing 12-Month GAAP Operating Margin: 1.9%

Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ: FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.

Why Does FWRG Worry Us?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
2. Increased cash burn over the last year raises questions about the return timeline for its investments
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

First Watch’s stock price of $17.42 implies a valuation ratio of 58.6x forward P/E. To fully understand why you should be careful with FWRG, check out our full research report (it’s free).

Packaging Corporation of America (PKG)

Trailing 12-Month GAAP Operating Margin: 12.3%

Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.

Why Are We Cautious About PKG?

1. Disappointing unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Efficiency has decreased over the last five years as its operating margin fell by 3.7 percentage points
3. Waning returns on capital imply its previous profit engines are losing steam

At $238.06 per share, Packaging Corporation of America trades at 22.1x forward P/E. Read our free research report to see why you should think twice about including PKG in your portfolio.

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