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System Optimization Efforts to Aid Wendy's (WEN) Q4 Earnings

Zacks Equity Research

The Wendy’s Company WEN is slated to release fourth-quarter 2018 results on Feb 21, after the closing bell.

The company’s initiatives like menu innovation, technological upgrades, international expansion and re-imaging of units are continuing to drive revenue growth. In the fourth 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 two of the trailing four quarters, the average beat being 0.6%. Backed by a decent earnings trend and other efforts, shares of Wendy’s have gained 8.9% in the past month, outperforming the industry’s 3.9% rally.

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

Top Line to Gain

In the first nine months of 2018, Wendy’s total revenues increased 3.9%. This upside trend is likely to have continued in the fourth quarter. Subsequently, the Zacks Consensus Estimate for revenues for the fourth quarter is pegged at $400.3 million, suggesting 29.4% growth from the year-ago quarter.

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, third-quarter 2018 marked the 22nd 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 fourth quarter of 2018, the consensus estimate for company-operated comps is projected to grow 1.4%, comparing favorably with 1.2% rise recorded in the third quarter. Moreover, franchised comps are projected to increase 0.8% against 0.1% decline in comps in the third quarter of 2018.

How Will Earnings Shape Up?

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 fourth quarter, the consensus estimate for earnings stands at 15 cents, reflecting 36.4% year-over-year growth.

In the last reported quarter, system optimization favored the company’s adjusted EBITDA, which grew 9.8% from the year-ago level. Earnings in the third quarter also grew 88.9% year over year on higher revenues, effective tax rate and strong EBITDA margins.

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 0.00% and a Zacks Rank #3, a combination that decreases the likelihood of an earnings beat.

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

The Wendy's Company Price and EPS Surprise


The Wendy's Company Price and EPS Surprise | The Wendy's Company 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 this quarter.

Cracker Barrel CBRL currently carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +0.95%. The company is scheduled to report quarterly numbers on Feb 26.

El Pollo Loco LOCO has an Earnings ESP of +7.14%. The company presently carries a Zacks Rank #2.

Dave & Buster’s PLAY has an Earnings ESP of +0.26% and a Zacks Rank #3.

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