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Soft Comps, High Costs to Hurt Potbelly (PBPB) Q1 Earnings

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Potbelly Corporation (PBPB - Free Report) is scheduled to report first-quarter 2018 results on May 8, after market close.

We expect the company’s top line in the first quarter to be favored by net unit growth, whereas limited traffic trend is likely to have affected comps in the quarter. High costs associated with restaurant operations might have also affected its earnings in the to-be-reported quarter.

Notably, shares of Potbelly have gained 7.8% in the past year, outperforming the industry’s gain of 5.1%.

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 to Favor Top Line

The Zacks Consensus Estimate for revenues for the to-be-reported quarter is pegged at $103.20 million, reflecting an increase of 1.5% from the year-ago actual figure. Also, in the last reported quarter, total revenues increased 9.6% to $112 million and the upside trend is likely to have continued in the first quarter as well.

We expect new 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.

The consensus estimate for the number of franchised units at the end of the first quarter stands at 58, reflecting year-over-year growth of 13.7%. The number of company-operated units is anticipated to be up 19.9%. The Zacks Consensus Estimate for the same is pegged at 495.

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.

Comps Anticipated to Remain Under Pressure

A challenging operating environment has led Potbelly to witness comps decline in each of the quarters in 2017. The fickle nature of consumer demand coupled with food inflation are expected to have lingered in the first quarter as well. Subsequently, the consensus estimate for comps projects a decline of 2.6% in the first quarter, comparing unfavorably with the last reported quarter’s fall of 2.4%.

However, as the overall restaurant industry is treading on the path to a slow but steady recovery, first-quarter comps decline for Potbelly is expected to compare favorably with the prior-year quarter’s fall of 3.1%.

High Costs to Affect Margins

The restaurant industry has been bearing the brunt of high costs associated with labor, cost of goods and advertisement. Potbelly is also incurring high labor costs. Moreover, increased expenses related to unit development and sales-building efforts are likely to have dented the company’s first-quarter margins.

For the full year of 2017, the company’s operating expenses increased 80 basis points compared with the prior-year period. We believe these costs to have affected the company’s earnings in the first quarter as well. Consequently, the consensus estimate for the company’s bottom line for the to-be-reported quarter is pegged at a penny, suggesting an 80% decrease from the year-ago quarter.

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. A Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks 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 has a Zacks Rank #3 and an Earnings ESP of -20.00%, a combination that makes surprise prediction difficult.

Potbelly Corporation Price and EPS Surprise

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.

Bojangles (BOJA - Free Report) has an Earnings ESP of +9.18% and carries a Zacks Rank #3. The company is scheduled to report quarterly results on May 8. You can see the complete list of today’s Zacks #1 Rank stocks here.

Carrols Restaurant (TAST - Free Report) has an Earnings ESP of +8.57% and carries a Zacks Rank #3. The company is slated to report quarterly results on May 8.

Jack in the Box (JACK - Free Report) has an Earnings ESP of +2.91% and holds a Zacks Rank #3. The company is expected to report quarterly results on May 15.

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