While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".

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 avoid and some better opportunities instead.

Dollar General (DG)

Trailing 12-Month GAAP Operating Margin: 4.2%

Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.

Why Are We Hesitant About DG?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Gross margin of 29.9% is below its competitors, leaving less money for marketing and promotions
3. 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Dollar General is trading at $112.54 per share, or 19.3x forward P/E. Check out our free in-depth research report to learn more about why DG doesn’t pass our bar.

First Watch (FWRG)

Trailing 12-Month GAAP Operating Margin: 1.7%

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 Are We Cautious About FWRG?

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. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $17.35 per share, First Watch trades at 56x forward P/E. Read our free research report to see why you should think twice about including FWRG in your portfolio.

Illinois Tool Works (ITW)

Trailing 12-Month GAAP Operating Margin: 26%

Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE: ITW) manufactures engineered components and specialized equipment for numerous industries.

Why Is ITW Not Exciting?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Projected sales growth of 4% for the next 12 months suggests sluggish demand
3. Earnings per share lagged its peers over the last two years as they only grew by 6.2% annually

Illinois Tool Works’s stock price of $259.22 implies a valuation ratio of 24.2x forward P/E. Check out our free in-depth research report to learn more about why ITW doesn’t pass our bar.

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