Noodles & Company NDLS is set to report third-quarter 2015 results on Nov 5, before the market opens. Last quarter, the company posted a negative earnings surprise of 16.67%. In fact, the company has posted negative surprises in three of the trailing four quarters
Let’s see how things are shaping up for the upcoming announcement.
Factors at Play
Higher costs and expenses as well as declining margins have had a negative impact on Noodles & Company’s profits over the past few quarters. In fact, costs of goods sold of this fast casual restaurant are likely to be high in the third quarter owing to increased marketing and labor costs as well as higher expenses related to the implementation of strategic initiatives, thereby hurting margins. Also, pre-opening costs of restaurants and higher overhead costs would keep the margins under pressure.
Noodles & Company’s comps have been sluggish over the past few quarters, mainly due to negative comps recorded in Colorado, Washington D.C. and Austin. Although comps in these markets are improving, a major turnaround is unlikely in the to-be-reported quarter.
However, Noodles & Company is taking all the necessary steps to boost growth. Menu innovation, like testing the kids’ meal, is an important part of its strategy, complemented by limited time offers. Also, its catering program has received an overwhelming response. Like some other restaurant chains, Noodles & Company is also capitalizing on digital technology. Online ordering continues to grow at a rapid pace. We believe that these initiatives would improve traffic, thereby aiding comps.
Earnings Whispers
Our proven model does not conclusively show that Noodles & Company 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: Noodles & Company’s Earnings ESP is +14.29%. This is because the Most Accurate estimate is pegged at 8 cents, while the Zacks Consensus Estimate stands at 7 cents.
Zacks Rank: Noodles & Company has a Zacks Rank #4 (Sell).
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 broader consumer discretionary sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Popeyes Louisiana Kitchen, Inc. PLKI, with an Earnings ESP of +2.27% and a Zacks Rank #2.
Bob Evans Farms, Inc. BOBE, with an Earnings ESP of +2.5% and a Zacks Rank #1.
Cracker Barrel Old Country Store, Inc. CBRL with an Earnings ESP of +0.63% and a Zacks Rank #1.
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