Restaurants are go-to meeting hubs for friends, family, and colleagues. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 5% over the past six months. This drop is a noticeable divergence from the S&P 500’s 6.7% return.

A cautious approach is imperative when dabbling in these companies as many will light cash on fire by opening new locations without the proper justifications. On that note, here are three restaurant stocks that may face trouble.

Starbucks (SBUX)

Market Cap: $109.1 billion

Started by three friends in Seattle’s historic Pike Place Market, Starbucks (NASDAQ: SBUX) is a globally-renowned coffeehouse chain that offers a wide selection of high-quality coffee, beverages, and food items.

Why Is SBUX Risky?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 6.8 percentage points
3. Performance over the past six years shows its incremental sales were much less profitable, as its earnings per share fell by 5.9% annually

Starbucks’s stock price of $95.66 implies a valuation ratio of 38.3x forward P/E. To fully understand why you should be careful with SBUX, check out our full research report (it’s free).

Darden (DRI)

Market Cap: $24.92 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 Is DRI Not Exciting?

1. The company has faced growth challenges as its 6.4% annual revenue increases over the last six years fell short of other restaurant companies
2. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
3. Lacking pricing power results in an inferior gross margin of 21.6% that must be offset by turning more tables

Darden is trading at $216.57 per share, or 19.8x forward P/E. Read our free research report to see why you should think twice about including DRI in your portfolio.

Bloomin' Brands (BLMN)

Market Cap: $582 million

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 Sell BLMN?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Sales are projected to be flat over the next 12 months and imply weak demand
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $6.90 per share, Bloomin' Brands trades at 6.9x forward P/E. Dive into our free research report to see why there are better opportunities than BLMN.

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