As the Q2 earnings season comes knocking, investors may want to look at the U.S. restaurant space which has been showing signs of recovery.
The latest Earnings Preview(as of Jul 13) shows upbeat expectations from this earnings season, with the bottom line of the S&P 500 index expected to grow 19.5% and revenues projected to rise 8.2%.Notably, releases from 27 S&P 500 companies so far show year-over-year earnings and revenue growth of 19.1% and 9.7%, respectively. Moreover, 88.9% of the companies surpassed earnings and revenue estimates.
Restaurant Industry Looks Up
After surviving the seven-quarter spell of declining comps, the restaurant industry made a spectacular comeback in the fourth quarter of 2017. Ever since, the industry has been recovering, slow yet steady. Per TDn2K’s The Restaurant Industry Snapshot, the industry witnessed comps growth in three straight quarters — 0.4% in fourth-quarter 2017, 0.1% in first-quarter 2018 and 0.8% in the second quarter. In the first half of 2018, overall sales nudged up 0.5% against a 1.2% fall in the first half of 2017.
Growth in comps throughout the first half of 2018 can be attributed to the rise in consumer demand and discretionary spending. This is evident from the guest check’s growth in recent quarters. For the first six months of 2018, average check increased 2.9%, up from the 2.2% rise a year ago. In the first half of 2018, the casual dining and fast casual category saw the maximum improvement, reflecting a shift in consumer taste and preference. Meanwhile, most gains in the industry were derived from to-go and delivery sales.
Restaurant Bigwigs Gear Up
Per a National Restaurant Association report, majority of restaurant operators are chalking out capital expenditure plans for the remainder of the year. Notably, 64% of restaurant companies are planning to expand, remodel and innovate across menu offerings over the next six months. Digital innovation has also become the need of the hour. Restaurant operators are continuously partnering with delivery channels and digital platforms to drive incremental sales. We believe that such efforts will continue to benefit the industry for the rest of 2018. Also, a favorable effect on consumers’ personal income from tax cut is sure to act as a catalyst.
Speed Breakers on the Way
Despite the improving trend, a few concerns continue to hover. The overall Retail – Restaurants industry’s collective decline has been 3.7% against the S&P Composite market’s increase of 2.1% in the first six months of 2018.
First and foremost, persistent erosion in traffic is a pressing concern. Notably, same-store traffic was down 2% in the second quarter of 2018, per TDN2K proving that only guest checks and not guest counts are contributing to restaurant sales. However, same-store traffic compared favorably with the 2.6% decline in the first quarter of 2018.
Secondly, most restaurants are understaffed. With turnover rates rising for both restaurant hourly employees and restaurant managers, a shortage of qualified skill has been a concern for restaurant operators.
Finally, recent data shows that there is a plethora of restaurants in the United States, inducing fierce competition among operators. Restaurants also face stiff rivalry from sectors like grocery store prepared foods and convenience stores.
Q2 Earnings Expectations
Notably, majority of the Zacks broad sectors (11 out of 16) are expected to report double-digit growth in the second quarter of 2018. Restaurants in the wider Retail wholesale sector seem to have a solid footing as well. The latest earnings outlook predicts a 18.3% rise in the sector’s second-quarter earnings compared with 21.1% growth in the last reported quarter. Revenues in the quarter are expected to rise 8% (a little lower than first quarter’s 8.8%). Margins in the quarter are anticipated to increase 0.4%, compared with the prior quarter’s increase of 0.5%.
How to Pick the Right Stocks?
Amid a wide range of restaurant stocks, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.
While it is impossible to be sure of the outperformers, our proprietary methodology — positive Earnings ESP along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are a few restaurant companies that might interest investors.
Restaurant Brands International Inc.(QSR - Free Report) is expected to release second-quarter numbers on Aug 1. The company flaunts a Zacks Rank #1 and has an Earnings ESP of +7.60%. The Zacks Consensus Estimate for earnings is pegged at 63 cents, reflecting a 23.5% increase from the year-ago quarter. The company topped earnings estimates in each of the trailing four quarters, the average beat being 16.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Cheesecake Factory Incorporated(CAKE - Free Report) carries a Zacks Rank #3 and has an Earnings ESP of +1.61%, suggesting an earnings beat in the second quarter of 2018. The consensus estimate calls for earnings at 81 cents, mirroring growth of 3.9% from the year-ago level. However, when looked at the last four quarters, the company missed estimates in two quarters taking the average negative surprise to 5.4%. Cheesecake Factory will release results on Jul 31.
Our next pick would be The Wendy's Company (WEN - Free Report) . Carrying a Zacks Rank #2 and Earnings ESP of +1.59%, the company is slated to beat analysts’ expectations in the second quarter of 2018. Also, earnings estimates for the quarter are pegged at 16 cents, suggesting 6.7% year-over-year growth. However, the company missed earnings in two of the last four quarters, recording an average negative surprise of 2%. Wendy’s is scheduled to release its quarterly numbers on Aug 7.
Brinker International, Inc.(EAT - Free Report) , another renowned restaurant operator, topped earnings estimates in three of the trailing four quarters, the average beat being 7.2%. With a Zacks Rank #3 and an Earnings ESP of +1.29%, the company is likely to beat estimates in the to-be-reported quarter. The consensus estimate calls for earnings of $1.20 in the quarter, reflecting a year-over-year increase of 10.1%. Brinker is expected to release fourth-quarter fiscal 2018 results on Aug 9.
McDonald's Corporation(MCD - Free Report) is scheduled to release second-quarter 2018 results on Jul 26. The company, apart from carrying a Zacks Rank #3, has an Earnings ESP of +0.52%, suggesting a beat in the quarter. Moreover, the consensus estimate calls for earnings of $1.93 in the quarter, projecting 11.6% growth from the year-ago level. McDonald’s has topped earnings estimates in each of the past four quarters, the average beat being 5.5%.
Domino's Pizza, Inc.(DPZ - Free Report) has a Zacks Rank #3 and an Earnings ESP of +0.26%. The consensus estimate for second-quarter earnings is pegged at $1.76, suggesting 33.3% year-over-year growth. Moreover, Domino’s posted a positive earnings surprise in each of the last four quarters, the average being 6.3%. The company is scheduled to report results on Jul 19, before the market opens.
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