From fast food to fine dining, restaurants play a vital societal role. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. Unfortunately, these factors have spelled trouble for the industry as it has shed 9.1% over the past six months. This drop was disappointing since the S&P 500 stood firm.

Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three restaurant stocks we’re swiping left on.

Wendy's (WEN)

Market Cap: $2.35 billion

Founded by Dave Thomas in 1969, Wendy’s (NASDAQ: WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.

Why Does WEN Worry Us?

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. Demand will likely fall over the next 12 months as Wall Street expects flat revenue
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $12.22 per share, Wendy's trades at 12.1x forward P/E. Read our free research report to see why you should think twice about including WEN in your portfolio.

Krispy Kreme (DNUT)

Market Cap: $536.3 million

Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.

Why Do We Pass on DNUT?

1. Earnings per share have dipped significantly over the past three years, which is concerning because stock prices follow EPS over the long term
2. Negative free cash flow raises questions about the return timeline for its investments
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Krispy Kreme is trading at $3.11 per share, or 31.2x forward P/E. Check out our free in-depth research report to learn more about why DNUT doesn’t pass our bar.

Cracker Barrel (CBRL)

Market Cap: $1.25 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 Do We Think CBRL Will Underperform?

1. Annual revenue growth of 2.3% over the last five years was below our standards for the restaurant sector
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 17.1% annually while its revenue grew
3. High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Cracker Barrel’s stock price of $55.36 implies a valuation ratio of 20.8x forward P/E. To fully understand why you should be careful with CBRL, check out our full research report (it’s free).

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