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The Wendy's Company (WEN) Q1 Earnings: Will it Beat?

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The Wendy's Company (WEN - Free Report) is set to report first-quarter 2016 results on May 11, before the opening bell.

Last quarter, the company posted a positive earnings surprise of 9.09%, bringing the trailing four-quarter average to 7.62%.

Let’s see how things are shaping up for the upcoming announcement.

Why a Likely Positive Surprise?

Our proven model shows that The Wendy's Company is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP : The company’s Earnings ESP, which represents the difference between the Most Accurate estimate (7 cents) and the Zacks Consensus Estimate (6 cents), is +16.67%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.

Zacks Rank : Wendy’s carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 or #3 (Hold) have a significantly higher chance of beating earnings. Sell-rated stocks (#4 or #5), on the other hand, should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

The combination of Wendy’s Zacks Rank #2 and +16.67% ESP makes us confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

The company remains on track to achieve its Image Activation goals for 2016 as a part of its brand transformation initiative. This program began in 2011 and has gained traction in the past two years leading to increased traffic and higher sales at its restaurants.

Wendy’s has also undertaken a system optimization initiative since Jul 2013 that includes franchising of restaurants. Franchising a large chunk of the company’s system will lower the general and administrative expenses and boost earnings over the long term,

In fact, Wendy’s expects comps to remain under pressure in the to-be-reported quarter owing to the timing and composition of reimaged restaurants as well as the sale of restaurants under the system optimization initiative.

However, comps declines are expected to be partially mitigated by Wendy’s focus on menu innovation, value-based promotional offers and bold new packaging to increase traffic. In fact, the company has posted continuous comps growth since the beginning of 2013 backed by these initiatives. Meanwhile, to enhance guests’ convenience, the company has incorporated digital initiatives – which should aid the top line as well as margins in the first quarter.

Other Stocks to Consider

Some stocks in the restaurant space that have both a positive Earnings ESP and a favorable Zacks Rank are:

Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , with an Earnings ESP of +3.39% and a Zacks Rank #1.

Texas Roadhouse, Inc. (TXRH - Free Report) , with an Earnings ESP of +2.27% and a Zacks Rank #2.

Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , with an Earnings ESP of +0.91% and a Zacks Rank #3.

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