Colorado-based casual-dining restaurants chain Potbelly Corporation PBPB is set to report first-quarter 2015 results on May 5, after the market closes.
Last quarter, the company posted a positive earnings surprise of 50.00% primarily backed by better-than-expected revenues. Let’s see how things are shaping up for the upcoming announcement.
Factors to Consider
Potbelly reported positive comps in the second half of 2014 and we expect the trend to continue in the to-be-reported quarter as well. Improving traffic trends — mainly on the back of the company’s extensive menu innovation and aggressive marketing initiatives — are expected to drive comps growth in the first quarter.
Further, the company is opening more outlets in the U.S. to benefit from consumers’ appetite for fast-casual restaurants which should add to the top line.
Nevertheless, we are concerned about the company’s rising costs. Increased labor costs and commodity inflation — especially the cost of fresh ground beef — is likely to remain a concern. Prolonged drought conditions in the southern U.S. Great Plains region led to the increase in retail beef costs in the recent past. We believe the company’s rising cost structure will hurt first-quarter margins as well.
Earnings Whispers
Our proven model does not conclusively show that Potbelly is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP for Potbelly is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 2 cents.
Zacks Rank: Potbelly has a Zacks Rank #3 (Hold), which when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Ruby Tuesday, Inc. RT, with an Earnings ESP of +50.00% and a Zacks Rank #1 (Strong Buy).
DineEquity, Inc. DIN, with an Earnings ESP of +0.63% and a Zacks Rank #3.
Shake Shack Inc. SHAK, with an Earnings ESP of +33.33% and a Zacks Rank #3.
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