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Factors Likely to Set Tone for Wendy's (WEN) Q2 Earnings

Zacks Equity Research

The Wendy's Company WEN is scheduled to report second-quarter 2019 numbers on Aug 7, before the market opens.

The company’s initiatives like menu innovation, technological upgrades, international expansion and re-imaging of units are continuing to drive revenue growth. In the second quarter, the company’s top line is expected to have benefited from continued sales-boosting efforts. Additionally, system optimization initiatives are likely to have given a boost to the bottom line.

Wendy’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 6%. Despite an impressive earnings trend, shares of the company have gained 13.2% so far this year, underperforming the industry’s 28.9% rally.

 

 

Given this backdrop, let’s delve deeper to find out factors that are likely to have a bearing on the company’s second-quarter results.

Will Top-Line Gain Continue?

In 2018, Wendy’s total revenues grew 3.8% year over year. Further, in the first quarter of 2019, revenues rose 7.4% from the year-ago quarter, driven by increased sales at company-operated restaurants. We believe that the upside trend is likely to have continued in the second quarter as well. Subsequently, the Zacks Consensus Estimate for revenues for the second quarter is pegged at $441 million, suggesting 7.3% growth from the year-ago quarter’s reported figure.

Revenues are being favored by increased rental revenues related to Franchise Flips completed in 2017, and positive comps recorded at company-operated and franchise-operated restaurants.

We believe that increased investments in technology like mobile payment and ordering, customer self-order kiosks, and efforts like re-imaging of restaurants and new menu offering are likely to have boosted traffic and thereby sales.

Comps Growth to Persist

Notably, first-quarter 2019 marked the 24th consecutive quarter of same-store sales growth for Wendy’s. This indicates the brand’s long-term strength and relevance. We expect the company to maintain the trend in the soon-to-be-reported quarter through the solid menu pipeline, limited time offers (LTO), marketing initiatives, and increased emphasis on core and price value offerings.

In fact, for the second quarter of 2019, the consensus estimate for company-operated comps is projected to grow 1.2%. Moreover, franchised comps are projected to increase 1.4%.

System Optimization to Aid Earnings

Although increased costs related to sales-boosting initiatives and higher wages might weigh on margins, system optimization initiatives are likely to boost the to-be-reported quarter’s earnings on reduced expenses. For the second quarter, the consensus estimate for the company’s earnings stands at 17 cents, suggesting 21.4% year-over-year growth.

In the last reported quarter, system optimization favored its adjusted EBITDA, which grew 1.2% from the year-ago level. Earnings in the first quarter also grew 27.3% year over year.

Our Model Doesn’t Suggest a Beat

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Presently, Wendy’s has an Earnings ESP of -1.06% and a Zacks Rank #3, a combination that decreases the likelihood of an earnings beat.

The Wendy's Company Price and EPS Surprise

 

The Wendy's Company Price and EPS Surprise

The Wendy's Company price-eps-surprise | The Wendy's Company Quote

Stocks to Consider

Here are a few stocks from the Retail-Wholesalesector that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the second quarter.

Burlington Stores BURL currently has an Earnings ESP of +2.53% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch ANF presently has a Zacks Rank #3 and an Earnings ESP of +1.50%.

Casey's General Stores CASY currently has an Earnings ESP of +0.90% and a Zacks Rank #1.

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