The Wendy's Company WEN is set to report third-quarter 2015 results on Nov 4. Last quarter, the company posted a negative earnings surprise of 11.11%. Let’s see how things are shaping up for the upcoming announcement.
Factors at Play
Wendy’s revenues have been sluggish for a while now. 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. In fact, Wendy’s expects comps to remain under pressure in the second half of 2015 owing to the timing and composition of reimaged restaurants and the impact of the sale of restaurants under the system optimization initiative.
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 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 initiatives. Meanwhile, keeping in mind the convenience of its consumers, the company is set to capitalize on the benefits of technology. 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 of #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 8 cents. Hence, the difference is 0.00%.
Zacks Rank #3 (Hold): Wendy’s Zacks Rank #3 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
Some stocks in the restaurant that have both a positive Earnings ESP and a favorable Zacks Rank are:
Bob Evans Farms, Inc. BOBE, with an Earnings ESP of +2.5% and a Zacks Rank #1 (Strong Buy).
Wingstop Inc. WING, with an Earnings ESP of +11.11% and a Zacks Rank #2 (Buy).
Popeyes Louisiana Kitchen, Inc. PLKI, with an Earnings ESP of +2.27% and a Zacks Rank #2.
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