From fast food to fine dining, restaurants play a vital societal role. 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 4% over the past six months. This performance was discouraging since the S&P 500 returned 4.1%.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one restaurant stock boasting a durable advantage and two best left ignored.

Two RestaurantStocks to Sell:

Cracker Barrel (CBRL)

Market Cap: $1.46 billion

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 Are We Out on CBRL?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
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 $65 implies a valuation ratio of 23.2x forward P/E. To fully understand why you should be careful with CBRL, check out our full research report (it’s free).

Arcos Dorados (ARCO)

Market Cap: $1.54 billion

Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE: ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.

Why Are We Hesitant About ARCO?

1. Lacking pricing power results in an inferior gross margin of 13.2% that must be offset by turning more tables
2. Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $7.28 per share, Arcos Dorados trades at 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why ARCO doesn’t pass our bar.

One Restaurant Stock to Watch:

Yum! Brands (YUM)

Market Cap: $41.41 billion

Spun off as an independent company from PepsiCo, Yum! Brands (NYSE: YUM) is a multinational corporation that owns KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill.

Why Do We Like YUM?

1. Aggressive expansion of new stores reflects an offensive push to quickly grow and sell in markets where it has few or no locations
2. Highly efficient business model is illustrated by its impressive 32.1% operating margin
3. Strong free cash flow margin of 18.9% enables it to reinvest or return capital consistently

Yum! Brands is trading at $148.96 per share, or 24.2x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.

High-Quality Stocks for All Market Conditions

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