The Wendy's Company WEN is set to report first-quarter 2015 results on May 6. Last quarter, the company posted in-line results. Let’s see how things are shaping up for the upcoming announcement.
Factors to Consider
Wendy’s’ focus on brand transformation, including menu innovation, promotional offers and bold new packaging are expected to aid the first-quarter top line. In fact, the company has posted continuous comps growth since the beginning of 2013 backed by these sales driving initiatives.
Also, the company’s efforts to reimage its restaurants have gained traction over the past two years which increased traffic and sales. On the promotional front, the company is using digital devices and social media platforms like Facebook and YouTube. These initiatives are expected to improve the top line as well as margins and help the company maintain the trend.
However, like other food and restaurant companies, rising food costs pose a major challenge to Wendy’s. In fact, margins are expected to be negatively impacted by higher food costs, particularly beef prices. Also, worldwide wage increases and costs incurred to fulfill its sales driving initiatives would compound the woes.
Another concern over the near term is franchising of restaurants, a system optimization initiative undertaken by Wendy’s in Jul 2013. Though franchising a large chunk of its system will lower the company’s general and administrative expenses and thereby boost earnings over the long term, it would weigh on near-term revenues. In fact, the company’s revenues have been declining year over year due to franchising.
Also, revenues are expected to be dampened by temporary restaurant closures due to speeding up of the reimaging activity.
Earnings Whispers
Our proven model does not conclusively show that Wendy's 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: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 5 cents. Hence, the difference is 0.00%.
Zacks Rank: Wendy’s has a Zacks Rank #3 (Hold) which when combined with a 0.00% ESP makes surprise prediction difficult.
Note that the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
Stocks to Consider
Some stocks in the broader consumer discretionary sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Ruby Tuesday, Inc. RT, with an Earnings ESP of +50.00% and a Zacks Rank #1 (Strong Buy).
Darden Restaurants, Inc. DRI, with an Earnings ESP of +2.15% and a Zacks Rank #1.
DineEquity Inc. DIN, with an Earnings ESP of +1.36% and a Zacks Rank #3.
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