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High Expenses to Hurt Restaurant Brands (QSR) in Q1 Earnings

Zacks Equity Research

Restaurant Brands International Inc.’s QSR strong brand presence, solid expansion efforts, and innovation of restaurant appearances and menu are expected to drive the top line in the first quarter of 2019. However, a higher cost of operation may have dented earnings in the to-be-reported quarter.

The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 4.9%. Backed by a decent earnings trend, shares of Restaurant Brands have gained 27.1% so far this year, outperforming the industry’s 14.2% rally.

Let us find out how the company’s top and bottom lines shaped up in the first quarter.

 

Top Line to Gain From Sales-Building Efforts

In 2018, Restaurant Brands’ total revenues increased 0.7% year over year, driven by an increase in system-wide sales across the brands. The increase in revenues can be attributable to the company’s strong efforts in product development.

Apart from aggressive store openings, Restaurant Brands has a continual focus on balanced menu design, expansion of delivery business, promotional offerings, efforts to grow breakfast daypart and product launches. It is also taking initiatives to re-image restaurants to more modern décor. The company plans to re-image the majority of restaurants across Canada over the next four years.

Restaurant Brands is encouraged by the long-term growth prospects of the Tim Hortons brand and remains committed to delivering on the international growth strategy of expanding the brand around the world. In this regard, the company recently formed master franchise joint venture partnerships (MFJVs) for the brand in Mexico and Spain. The regions, where it signed development agreements, include Cincinnati, Columbus, Indianapolis, Minneapolis, Cleveland and Youngstown.

All these factors lead us to believe that Restaurant Brands’ revenues have increased in the first quarter of 2019 as well. Subsequently, the Zacks Consensus Estimate for revenues in the first quarter is pegged at $1.3 billion, reflecting a 0.6% increase from the prior-year quarter.

How Will Earnings Shape Up?

Although the strong top line is likely to have bolstered Restaurant Brands’ earnings in the first quarter of 2019, we remain slightly apprehensive of the overall increase in expenses that it is shouldering. In 2018, general and administrative expenses increased 3.1% year over year, and the trend is likely to have continued in the first quarter. Also, the company is troubled with constant fluctuations in wage and commodity inflation.

The Zacks Consensus Estimate for Restaurant Brands’ earnings in the first quarter is pegged at 59 cents, reflecting a 10.6% decline from the year-ago quarter.

Quantitative Model Prediction

Our proven model doesn’t show that Restaurant Brands has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat in the first quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Restaurant Brands has an Earnings ESP of 0.00%. Notably, Earnings ESP represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Restaurant Brands International Inc. Price and EPS Surprise

 

Restaurant Brands International Inc. Price and EPS Surprise | Restaurant Brands International Inc. Quote

Stocks to Consider

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

Bloomin’ Brands BLMN presently carries a Zacks Rank #3 and has an Earnings ESP of +2.08%. The company is scheduled to report quarterly numbers on Apr 25.

Yum! Brands YUM has an Earnings ESP of +3.11% and a Zacks Rank #2 (Buy). The company is scheduled to report quarterly numbers on May 1.

Dunkin’ Brands DNKN has an Earnings ESP of +0.27% and a Zacks Rank #3.

Zacks' Top 10 Stocks for 2019

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Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
 
Restaurant Brands International Inc. (QSR) : Free Stock Analysis Report
 
Bloomin' Brands, Inc. (BLMN) : Free Stock Analysis Report
 
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
 
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