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Will Wendy's (WEN) Disappoint this Earnings Season?

Zacks Equity Research

The Wendy's Company (WEN) is set to report first quarter 2014 results on May 8, 2014. Last quarter, it posted a 10.0% positive surprise. Let’s see how things are shaping up for this announcement.

Factors to Consider

Though the company’s bottom line has improved due to its cost saving initiatives, the top line has been a drag for quite some time, missing the consensus mark through 2013. The system optimization initiative (completed in Mar 2014) has been affecting revenues. This initiative called for transition to a franchised based model. Per this initiative, the company sold its 418 company-operated restaurants to various franchisees.

Though the initiative is complete, these franchised based models would not generate the same amount of sales for the company as a company owned restaurant. Therefore, we do not expect revenues to improve much this quarter. However, international expansion, refurbishment of units, and an extensive menu bode well for the company and would offset the negative impacts to some extent.

We also anticipate margins to be hurt by the recent hike in beef prices and other commodities. Currently, beef prices are soaring and have hit their highest level in almost three decades.

Earnings Whispers?

Our proven model does not conclusively show that Wendy’s is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP:  Expected Surprise Prediction or ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at -20.0%.

Zacks Rank: Wendy’s Zacks Rank #3 (Hold) when combined with a negative ESP makes surprise prediction difficult. Note that the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks to Consider

Here are some companies in the restaurant industry and broader retail-wholesale sector that you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Tim Hortons Inc. (THI) with Earnings ESP of +3.28% and a Zacks Rank #3.

Advance Auto Parts Inc. (AAP) with Earnings ESP of +5.12% and a Zacks Rank #3.

Big Lots Inc. (BIG) with Earnings ESP of +2.27% and a Zacks Rank #3.

Read the Full Research Report on BIG
Read the Full Research Report on WEN
Read the Full Research Report on AAP
Read the Full Research Report on THI

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