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Potbelly (PBPB) Q2 Earnings: Is a Disappointment in Store?

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Potbelly Corporation (PBPB - Free Report) is set to report second-quarter fiscal 2017 results on Aug 4, after the market closes.

Last quarter, the company delivered a positive earnings surprise of 25.00%. In fact, this Chicago-based casual-dining restaurant’s earnings outpaced the Zacks Consensus Estimate in all of the trailing four quarters, with an average beat of 46.07%.

Let's see how things are shaping up for this announcement.

Potbelly Corporation Price and EPS Surprise


Factors to Consider

Potbelly had been reporting positive comps over the last few quarters. But the challenging operating environment in the U.S. restaurants space led to a decline in comps in first-quarter fiscal 2017. In fact, this difficult industry backdrop continues to persist and is expected to affect the to-be-reported quarter’s results too.

Nevertheless, Potbelly persists to undertake several initiatives that can aid in navigating through the tough environment. Evidently, it continues to develop a pipeline that will complement its core menu, while maintaining its operational efficiency. Further, the company has been using catering coordinators to manage its back-line operations and canvas business outside to drive sales. Notably, Potbelly’s continuous expansions add greatly to the top line and are also expected to do so in the to-be-reported quarter.

Moreover, the company’s investment in technology like its new app, which was launched in the fiscal first quarter, is also expected to boost growth across its business through increased convenience. Additionally, the recent launch of its customer engagement program – Potbelly Perks –should drive traffic as it enhances consumer loyalty.

However, increased labor expenses due to minimum wage increases across some of the markets in which the company operates, might prove to be a headwind. We note that the company’s rising cost structure is likely to hurt margins in the fiscal second quarter.

Potbelly also expects the recent shut down of its MidwayInternationalAirport outlet to pose a large threat to its business in the quarter, as it was the highest volume location.

Earnings Whispers

Our proven model does not conclusively show earnings beat for Potbelly this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as elaborated below.

Zacks ESP: Potbelly has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 12 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Potbelly has a Zacks Rank #4 (Sell).

As it is 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.

Stocks to Consider

Here are some companies in the broader Retail-Wholesale sector to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Alibaba Group Holding Limited (BABA - Free Report) has an Earnings ESP of +4.11% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

YUM! Brands, Inc. (YUM - Free Report) has an Earnings ESP of +1.64% and a Zacks Rank #2.

Dillard's, Inc. (DDS - Free Report) has an Earnings ESP of +30.00% and a Zacks Rank #3.

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