The Wendy's Company WEN is set to report second-quarter 2015 results on Aug 5. Last quarter, the company posted a positive earnings surprise of 20%. Meanwhile, in the last four quarters, the company has posted an average positive earnings surprise of 2.22%. Let’s see how things are shaping up for the upcoming announcement.
Factors at Play
Wendy’s revenues have been declining year over year over the past few quarters. This is due to the company’s system optimization initiative undertaken since Jul 2013 that calls for franchising of restaurants. 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 is currently weighing on revenues. Also, revenues are expected to be dampened by temporary restaurant closures due to speeding up of reimaging activity.
On the costs front, 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 fulfil its sales driving initiatives would compound woes.
However, revenue declines are expected to be partially mitigated by Wendy’s focus on menu innovation, promotional offers and bold new packaging to charm guests. 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. Meanwhile, keeping in mind the convenience of its consumers, the company is investing in areas like mobile payment, mobile ordering and customer self-order kiosks that provide benefits such as faster speed of service. These investments result in increased customer count and higher check. These initiatives are expected to aid the top line as well as margins in the soon-to be reported quarter.
Earnings Whispers
Our proven model does not conclusively show that Wendy's is likely to beat earnings this quarter. This 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: Wendy’s currently has a negative Earnings ESP. While the Most Accurate estimate stands at 8 cents, the Zacks Consensus Estimate is pegged higher at 9 cents. This equates to a difference of -11.11%.
Zacks Rank: Wendy’s has a Zacks Rank #3 (Hold) which when combined with a negative 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 momentum.
Stocks to Consider
Some stocks in the restaurant that have both a positive Earnings ESP and a favorable Zacks Rank are:
Red Robin Gourmet Burgers Inc. RRGB with an Earnings ESP of +2.63% and a Zacks Rank #1 (Strong Buy).
Jack in the Box Inc. JACK with an Earnings ESP of +2.74% and a Zacks Rank #1.
Brinker International, Inc. EAT with an Earnings ESP of +2.13% and a Zacks Rank #2 (Buy).
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