What’s in Store for Dunkin’ Brands’ (DNKN) Q3 Earnings?

Dunkin' Brands Group, Inc. (DNKN) is set to report third-quarter 2015 results on Oct 22, before the market opens.

Last quarter, the company posted a positive earnings surprise of 4.17%, largely due to an increase in revenues. In fact, the company has posted an average earnings surprise of 4.35% in the trailing four quarters.

Let's see how things are shaping up for this announcement.

Factors to Consider

Dunkin' Brands operates through its Dunkin' Donuts and Baskin-Robbins brands. The company’s strategic initiatives to boost sales such as more drive-through locations, menu innovation and breakfast-menu optimization should continue to boost third-quarter results. Meanwhile, the newly launched digital initiatives and global expansion, mainly in the emerging markets, are expected to aid the company's international operations.

However, Dunkin' Brands recently announced disappointing sales outlook for the third quarter, wherein Dunkin’ Donuts’ U.S. comps is expected to rise only 1.1% year over year. The soft comps growth was mainly due to the 70 basis points year-over-year traffic decline in the quarter. The expected comps growth was also much lower than the prior-quarter growth of 2.9% and the prior-year figure of 2.0%.

The muted comps expectation is mainly due to the fact that a major part of the company’s revenues come from the breakfast segment, which has become immensely competitive as a number of popular quick service restaurants are offering breakfast items all day. (Read: Dunkin' Issues Soft Q3 and 2015 Outlook; Falls 12%)

Further, like other restaurant chains, Dunkin' Brands' upcoming results are likely to be hurt by the food price inflation. Cost inflation would lead to higher expenses, in turn affecting third-quarter margins. Further, intense competition in the quick service space would hurt the company's top line.

Earnings Whispers

Our proven model does not conclusively show that Dunkin’ Brands 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 company’s Earnings ESP stands at -1.96%. This is because the Most Accurate estimate stands at 50 cents, while the Zacks Consensus Estimate is pegged higher at 51 cents.

Zacks Rank: Dunkin' Brands' Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about 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 momentum.

Stocks to Consider

Here are a few companies in the restaurant industry which have a favorable Zacks Rank and a positive Earnings ESP and are therefore likely to beat earnings:

Starbucks Corporation (SBUX), with an Earnings ESP of +2.33% and a Zacks Rank #2 (Buy).

Wingstop Inc. (WING), with an Earnings ESP of +11.11% and a Zacks Rank #2.

Noodles & Company (NDLS), with an Earnings ESP of +14.29% and a Zacks Rank #3.

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