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Potbelly's (PBPB) Unit Growth, Franchising to Aid Q2 Earnings

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Potbelly's (PBPB) Unit Growth, Franchising to Aid Q2 Earnings

While unit growth is likely to drive Potbelly's (PBPB) second-quarter revenues, franchising may favor its earnings.

Potbelly Corporation PBPB is scheduled to report second-quarter 2018 results on Aug 7, after the market closes.

We expect the company’s top line in the second quarter to be favored by net unit growth, whereas other sales-building efforts and a greater focus on franchising are expected to have favored earnings growth.

Notably, shares of Potbelly have gained 10.9% in the past year, outperforming the industry’s collective growth of 3.2%.

Let’s delve deeper into the factors that have likely shaped up the company’s earnings and revenues in the to-be-reported quarter.

Unit Growth & Sales Building Efforts to Drive Top Line

The Zacks Consensus Estimate for revenues for the to-be-reported quarter is pegged at $112.9 million, reflecting an increase of 4.4% from the year-ago actual figure. Moreover, in the last-reported quarter, total revenues increased 1% year over year. The upside trend is likely to have continued in the second quarter as well.

We expect net unit growth to contribute significantly to the anticipated top-line surge. The company is focusing on moderating company-operated unit growth while accelerating franchised unit improvement. Subsequently, the consensus estimate for the number of franchised units at the end of the second quarter stands at 60, reflecting year-over-year growth of 11.1%. The number of company-operated units is anticipated to be up 17.9%. The Zacks Consensus Estimate for the same is pegged at 500.

Apart from net unit growth, various sales-boosting initiatives such as improved digital innovation, distinguished menu offerings, and advertising and marketing strategies are likely to contribute toward the anticipated top-line growth.

Franchising to Favor Earnings

Despite increased expenses related to the unit development and sales-building efforts, Potbelly’s second-quarter earnings are expected to have gained from the increased franchise initiatives. The consensus estimate pegs second-quarter earnings at 13 cents, reflecting 18.2% growth from the year-ago quarter. We note that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth. Moreover, with a major portion of a business getting franchised, Potbelly will be less affected by food inflation than most of its peers.

Our Model Doesn’t Suggest a Beat

Please note that 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. Stocks with a Zacks Rank #4 or 5 (Sell-rated) are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Potbelly currently has a Zacks Rank #4 and an Earnings ESP of -4.00%, a combination that reduces the likelihood of an earnings beat.

Potbelly Corporation Price and EPS Surprise

Potbelly Corporation Price and EPS Surprise | Potbelly Corporation Quote

Stocks to Consider

Here are some companies in the restaurant space, which, per our model, have the right combination of elements to post an earnings beat in the to-be-reported quarter.

Jack in the Box JACK has an Earnings ESP of +0.88% and it currently carries a Zacks Rank #3. The company is scheduled to report quarterly results on Aug 8.

Brinker EAT, with a Zacks Rank #3, has an Earnings ESP of +2.03%. The company is expected to report quarterly results on Aug 9.

Dave & Buster’s PLAY has an Earnings ESP of +10.72% and it presently carries a Zacks Rank #2. The company is anticipated to report quarterly results on Sep 4.

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