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Will Burger King (BKW) Disappoint This Earnings Season?

Zacks Equity Research

Burger King Worldwide, Inc. (BKW) is slated to report its second-quarter 2014 results on Aug 1, 2014. Last quarter, it posted a surprise of 5.26%. Let’s see what’s in store for the company this season.

Factors to Consider

Burger King has surpassed the Zacks Consensus Estimate in three out of the last four trailing quarters and matched in the other quarter. This reflects company’s focus on restaurant re-imaging, menu improvement, marketing initiatives and improving operational efficiency. Also, its commitment to accelerate international expansion in high-growth potential markets mainly through franchising adds to profitability. These efforts would continue to aid Burger King’s revenues and profits in the second quarter.

However, rising food costs that have been a major challenge for most of the food and restaurant companies cannot be ignored. Per the U.S Department of Agriculture, the ongoing drought in California, could have large and lasting effects on fruit, vegetable, dairy and egg prices. It also expects drought conditions in Texas and Oklahoma to increase beef prices even higher.

Given this scenario, the company expects food cost inflation to increase 2.0% in the second quarter. Moreover, Burger King has been under pressure from worldwide wage increases. Hike in average rate of labor would further hurt profitability. 

These costs would be passed on to customers, thereby leading to increase in average spending per visit by the customers. Hence, traffic would decline, leading to lower revenues.

Moreover, U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks that is limiting discretionary spending. According to the International Monetary Fund, U.S. economic growth is expected to be the weakest this year since the recession ended. It expects 1.7% growth in 2014, down from 2.0% anticipated in June. Given the situation, the restaurant chain would experience lackluster results in the upcoming quarter.

Earnings Whispers?

Our proven model does not conclusively show that Burger King 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.

Negative Zacks ESP:  Burger King’s Earnings ESP, which represents the difference between the Most Accurate estimate of 22 cents and the Zacks Consensus Estimate of 23 cents stands at -4.35%.

Zacks Rank: Burger King’s Zacks Rank #3 (Hold) when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other 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:

Zoe's Kitchen, Inc. (ZOES), with an Earnings ESP of +50.0% and a Zacks Rank #2 (Buy).

Jack in the Box Inc. (JACK), with an Earnings ESP of +3.51% and a Zacks Rank #3.

Texas Roadhouse, Inc. (TXRH), with an Earnings ESP of +3.03% and a Zacks Rank #3.

Read the Full Research Report on BKW
Read the Full Research Report on JACK
Read the Full Research Report on TXRH
Read the Full Research Report on ZOES

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