From fast food to fine dining, restaurants play a vital societal role. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough. This makes spending somewhat unpredictable and has held back the industry over the past six months as its 3.7% gain has trailed the S&P 500 by 5.2 percentage points.
Investors should tread carefully as any operational misstep or unforeseen change in preferences can have you catching a falling knife. Taking that into account, here are three restaurant stocks best left ignored.
Starbucks (SBUX)
Market Cap: $116.6 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 Does SBUX Worry Us?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Estimated sales decline of 2.6% for the next 12 months implies a challenging demand environment
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 4.9 percentage points
At $100.54 per share, Starbucks trades at 36.8x forward P/E. Dive into our free research report to see why there are better opportunities than SBUX.
Yum China (YUMC)
Market Cap: $15.06 billion
One of China’s largest restaurant companies, Yum China (NYSE:YUMC) is an independent entity spun off from Yum! Brands in 2016.
Why Are We Wary of YUMC?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Projected sales growth of 5.4% for the next 12 months suggests sluggish demand
- Lacking pricing power results in an inferior gross margin of 20.3% that must be offset by turning more tables
Yum China is trading at $42.58 per share, or 14.3x forward P/E. Read our free research report to see why you should think twice about including YUMC in your portfolio.
Kura Sushi (KRUS)
Market Cap: $563.9 million
Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ:KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.
Why Is KRUS Not Exciting?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
Kura Sushi’s stock price of $49.49 implies a valuation ratio of 27.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why KRUS doesn’t pass our bar.
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