Over the past six months, BJ’s shares (currently trading at $34.51) have posted a disappointing 7.8% loss, well below the S&P 500’s 10.3% gain. This might have investors contemplating their next move.

Is there a buying opportunity in BJ's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think BJ's Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why BJRI doesn't excite us and a stock we'd rather own.

1. Same-Store Sales Falling Behind Peers

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

BJ’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.3% per year.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

BJ's has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 14.7% gross margin over the last two years. That means BJ's paid its suppliers a lot of money ($85.35 for every $100 in revenue) to run its business.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

BJ's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.6%, lower than the typical cost of capital (how much it costs to raise money) for restaurant companies.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of BJ's, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 16.2× forward P/E (or $34.51 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.

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