Potbelly Corporation PBPB is set to report second-quarter 2015 results on Aug 4, after the market closes.
Last quarter, the company posted a positive earnings surprise of 50.00%, primarily backed by better-than-expected revenues. In fact, the Colorado-based casual-dining restaurant chain surpassed earnings estimates in each of the trailing four quarters, with an average earnings surprise of 32.29%.
Let’s see how things are shaping up for the upcoming announcement.
Factors to Consider
Potbelly has reported positive comps over the past few quarters and we expect the trend to continue in the to-be-reported quarter as well. Positive traffic trends — mainly on the back of the company’s extensive menu innovation and aggressive marketing initiatives — are expected to drive comps.
Further, the company is focusing on unit growth in the U.S. to benefit from consumers’ appetite for fast-casual restaurants which should continue to add to the top line.
Nevertheless, we are concerned about the 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. The company’s rising cost structure is likely to hurt second-quarter margins.
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 (Strong Buy), 2 (Buy) or 3 (Hold) 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 11 cents.
Zacks Rank: Potbelly has a Zacks Rank #2, which when combined with a 0.00% ESP makes surprise prediction difficult.
Although the Zacks Rank #2 increases the predictive power of the ESP, however, we need to have a positive Earnings ESP to be confident of an earnings surprise.
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:
Red Robin Gourmet Burgers Inc. RRGB, with an Earnings ESP of +2.63% and a Zacks Rank #2.
Jamba, Inc. JMBA, with an Earnings ESP of +5.00% 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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