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Will Potbelly (PBPB) Surprise Q3 Earnings Estimates?

Colorado-based casual-dining restaurants chain Potbelly Corporation (PBPB) is set to report the third-quarter 2014 results on Nov 4, 2014, after the market close.

In the last quarter, the company posted a positive earnings surprise of 16.67%, primarily due to better-than-expected revenues. Let’s see how things are shaping up for the upcoming announcement.

Factors to Consider

Although Potbelly’s revenue growth was hampered by the harsh winter months during the first half of the year, we expect the trend to turnaround in the to-be-reported quarter. Traffic trends are expected to increase during the summer months and the company should deliver comps growth. The company’s extensive menu innovation and aggressive marketing initiatives are expected to drive comps growth in the third quarter.

Further, it is looking to benefit from consumers’ appetite for fast-casual restaurant in the U.S., by opening almost 40-48 outlets. Such robust growth will eventually add to its top line.

Nevertheless, we are concerned about the company’s rising costs and expenses. Increased labor costs and commodity inflation — especially the cost of fresh ground beef — is likely to remain a concern. Prolonged drought in the southern U.S. Great Plains led to the increase in retail beef costs. We believe the company’s rising cost structure will hurt margins, going forward.

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, 2 or 3 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 8 cents.

Zacks Rank: Potbelly has a Zacks Rank #3 (Hold), which when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

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:

Einstein Noah Restaurant Group, Inc. (BAGL), with an Earnings ESP of +4.55% and a Zacks Rank #3.

Red Robin Gourmet Burgers Inc. (RRGB), with an Earnings ESP of +3.03% and a Zacks Rank #3.

Burger King Worldwide, Inc. (BKW), with an Earnings ESP of +3.70% and a Zacks Rank #2 (Buy).

Read the Full Research Report on PBPB
Read the Full Research Report on RRGB
Read the Full Research Report on BAGL
Read the Full Research Report on BKW


Zacks Investment Research

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